On 13 April 2020, Mr Justice Snowden released his judgment in the matter of Carluccio’s Limited (in administration) and handed down declarations and directions to the joint administrators of the company. The directions set out the legal basis upon which the joint administrators could place a large number of the company’s employees on furlough, pursuant to the government’s Coronavirus Job Retention Scheme (furlough scheme).
This is an important decision for illustrating the circumstances in which the furlough scheme can potentially apply in relation to companies in administration and the potential hurdles to overcome.
The company operates a chain of Italian restaurants. It has over 70 branches and around 2,000 employees. All of the company’s branches have been closed since 16 March 2020 (following the prime minister’s advice that all restaurants should close as part of the government strategy for combatting the COVID-19 outbreak).
An administration order was made on 30 March 2020 by ICC Judge Mullen. The intended administration strategy is to “mothball” the company’s business and in parallel seek a sale of the business in order to achieve a better return for creditors than would otherwise be achieved if the company were wound up (administration strategy). As part of this administration strategy, the joint administrators wanted to retain the company’s employees rather than make them redundant.
Coronavirus Job Retention Scheme and inter-relation with insolvency legislation
However, the company had no money to pay the continuing wages of its employees. Unless the company was able to utilise the furlough scheme, the joint administrators faced the prospect of making the workforce redundant. It was submitted by the joint administrators that redundancy would have a manifestly prejudicial effect on the employees and the value of the company’s business which the joint administrators are hoping to sell.
Why did the court have to make directions on this issue?
The application was necessary because the government has provided no precise details of the furlough scheme’s legal structure, in particular, its operation in tandem with the insolvency legislation. Under the Insolvency Act 1986, the joint administrators had 14 days to make their decisions on retaining the employees, namely on or before Easter Monday. Hence the application was also urgent.
The furlough scheme and its application to company in administration
The joint administrators provided evidence that there is a reasonable likelihood of achieving a sale of the business whereby all willing employees would be TUPE transferred to the buyer and resume work (after the COVID-19 restrictions are lifted). On this basis the judge agreed with the joint administrators that the furlough scheme ought to be available to the company in respect of furloughed employees.
Variation of employment contracts (prior to 14 day time period)
Shortly after their appointment, the joint administrators wrote to all of the company’s employees who were not immediately required to assist with the administration strategy offering to continue to employ them on varied terms so as to take advantage of the furlough scheme arrangements for pay (variation letter). The overwhelming majority of the employees accepted that offer (consenting employees), some indicated that they preferred to be made redundant and retire (objecting employees) and a small number had not responded to the offer (non-responding employees).