Furlough and administration – the cases of Carluccio’s and Debenhams

We take a look at two recent High Court decisions on the impact of the government’s Coronavirus Job Retention Scheme on companies in administration. 

Carluccio’s – Administrators placing employees on furlough

The High Court in Re Carluccio's Ltd (in administration) held that the employment contracts of Carluccio’s employees had been validly varied when they agreed to the administrators’ proposal to furlough them under the government's Coronavirus Job Retention Scheme (the Scheme).   Under the furlough agreement, they were to be paid at the rates under the Scheme and limited to what was recoverable.

The administrators applied to the Court as they were concerned that any monies would be paid to them (rather than directly to the employees) and would therefore constitute assets of the administration.  The Court held that when the administrators made the claim under the Scheme, or made any payment under a varied contract, the effect was that they had “adopted” the contract of employment under insolvency law.  The effect of this was to give the employees super-priority ahead of payment of the administrators’ fees and expenses, floating charge creditors and unsecured creditors.   Therefore on receipt of the grant under the Scheme, payment could be made to the employees.  

Although almost all the employees had agreed to be furloughed, there was a small group who had not replied to the administrator’s furlough proposal.  The Court held that there had not been sufficient time for there to be consent by conduct in this particular case.  If those employees did subsequently agree, they would be in the same position as those who had already agreed.  However, the unvaried contracts of employees who did not reply would not be considered to be “adopted” with the result that the administrators did not need to dismiss them in order to avoid incurring super-priority liability in respect of them.  

Debenhams – Employees placed on furlough before administration

The High Court in Re Debenhams Retail Ltd considered how the Scheme may be implemented by administrators where the company had furloughed employees before the start of the administration.

The directors of Debenhams had placed its employees on furlough on the basis that the Scheme would apply to them and that their wages or salary would be payable only to the extent reimbursable under the Scheme. The directors did not ask the employees to consent to the arrangements. 

When administrators were subsequently appointed they were concerned that they would be deemed to have adopted the contracts of employment and that the super-priority accorded to the payments due to the employees would catch not only the amounts recoverable under the Scheme but also other amounts, such as additional wages or salary, sick pay and holiday pay. The administrators sought the express consent of employees to arrangements that capped their entitlement to wages or salary at the amount the company was able to claim from the Scheme and a large number of employees consented.

The administrator sought directions as to whether they could continue with the Scheme arrangements in relation to the employees without being deemed to have adopted the contracts of employment.  In line with the Carluccio’s decision, the court held that the administrators would be deemed to adopt the contracts of employment when they made a claim under the Scheme or when they paid wages to furloughed employees.  Although the decision exposes the administrators to priority liabilities, the fact that the vast majority of the employees consented to a cap on their entitlements had in fact largely mitigated the exposure before the case was heard.  This shows the importance of the administrators taking action to try to limit exposure to what is recoverable under the Scheme.