High Court offers clarity around furlough during administration

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A High Court judgment has provided clarity around how administrators should apply the Coronavirus Job Retention Scheme for employees whose employer has begun insolvency proceedings.

The administrators for Italian restaurant chain Carluccio’s, which went into administration on 30 March, sought clarification around how the scheme could be approached while maintaining compliance with insolvency law.

Earlier this month it was confirmed by the government that companies in administration were eligible under the scheme if there was a reasonable likelihood of rehiring the workers – for example, if it was to be sold to another party to continue trading – but Carluccio’s had little time to alter employees’ contracts under insolvency proceedings in order to do so.

On 30 April, Carluccio’s employees received a letter from administrators offering to continue to employ them on varied terms so that they could take advantage of the CJRS and claim back 80% of their wages from the government.

The letter said the company did not have the money to pay their wages now, but said that as soon as the funds were received by the government it would be able to pay them for furlough.

Of the 1,788 employees who received the letter, 1,707 consented to their contract being altered; four rejected it and said they wished to be made redundant; and 77 did not respond.

In their case before the High Court, the Carluccio’s administrators – FRP Advisory – sought clarification about which employees they could apply under the CJRS for.

They were concerned that they would have to make the 77 people who had not responded within 14 days of the letter redundant. Under insolvency rules, administrators normally have to dismiss workers within 14 days of their appointment in order to avoid liability for their employment and wages.

However, in the absence of government guidance on the issue, the High Court ruled it was in the interest of the company and its employees to allow the administrators to extend this 14 day period to allow staff who had not yet agreed to the alteration of their contract to consent to the changes so they could be furloughed.

Mr Justice Snowden said that employees who object to the change in terms or do not respond to the letter will be treated as “unsecured creditors” of the business, which means they would be among the last to be paid during an insolvency process.

He said: “The scheme guidance is explicit that the amount of the grant is to be paid into the employer’s bank account and is to be accounted for as income by the employer. As such, any grant monies paid will constitute assets of the company in administration.

“Under the insolvency legislation, administrators are not free to dispose of the assets of the company in administration as they see fit, but must do so in accordance with the insolvency legislation and, in particular, by making payments in the order of priorities prescribed in that legislation.”

The Unite union, which was also involved in the case, has urged Carluccio’s employees to respond to their letters or contact the administrators if they have not received one so the administrators can claim some income for them.

Unite’s assistant general secretary for political and legal affairs, Howard Beckett, said: “The new job retention scheme was put together in record time and its interaction with other areas of law – in this case insolvency law – needed to be looked at by the High Court.

“This important decision ensures that no one is left behind in a hospitality sector reeling from the effects of the shutdown.”

A spokesperson for Unite indicated that other companies that recently entered administration, including Debenhams, may also benefit from this judgment. Debenhams has been approached for comment.

2 Responses to High Court offers clarity around furlough during administration

  1. Avatar
    Mark 29 Apr 2020 at 12:48 pm #

    I started a new job on 16th March and cannot work because I am at home shielding a member of my family. My employer refusing to furlough me as he says I was not registered on the payroll before 19th March.

  2. Avatar
    Demsas Berhane Habtom 15 Jun 2020 at 7:44 pm #

    I started a job on 14th August and been made redundant,but I worked with them until 15th March and my last payment was on 20th March.My employer refusing to furlough me,so I asked them if my last payment was on 20th March that means I was in the payroll before 19th March.

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