The Joint Administrators sought directions upon the basis which they might place a number of Carluccio's' employees on "furlough" as part of the Coronavirus Job Retention Scheme ("the Scheme") announced on 20 March 2020. The Joint Administrators wrote to each of the employees and sought their agreement to amend their contracts of employment so that they might to be placed on furlough but made it clear that their wages would be restricted to the amount received by way of the grant received by the Company from the Government under the Scheme on a "pay when received" basis.

The judgment In the Matter of Carluccio's Limited (in Administration) was handed down by Mr Justice Snowdon in the High Court of Justice on Monday 13 April 2020. Since there was no draft legislation or regulations, only guidance from the Government, the challenges facing Mr Justice Snowdon were quite stark - he could decline to opine. This might have resulted in the Joint Administrators making all of Carluccio's employees redundant prior to the expiry of the 14 day period immediately following administration under the Insolvency Act to avoid adoption of the contracts of employment of the employees. That would fly in the face of the Chancellor's aims to save businesses. Thankfully Mr Justice Snowdon opted to interrogate the statutory framework under which the insolvency regime operates and reach a conclusion upon the issues before him.

Mr Justice Snowdon confirmed that the Scheme is available to companies in administration provided there is a reasonable prospect of the employees resuming work. The Joint Administrators confirmed to the court that several expressions of interest in Carluccio's business had been received and as such they were of the view that there was a reasonable prospect of a sale of the business. The court then considered the issue of those employees who did not respond to the Joint Administrators' letter seeking a variation of their contract of employment. The court held that (as with those employees who objected to the variation of their contract of employment) the contracts of employment of the employees who did not respond to the Joint Administrators' letter were not adopted by the Joint Administrators by virtue of such contracts not being terminated- such employees would fall to be treated as unsecured creditors of the Company in respect of amounts due under their contracts of employment.

However since the payments to be made by the Government under the Scheme are to be paid to the employer and not the employee that, in an insolvency situation, creates an issue for administrators who must distribute to creditors on a pre-determined statutory basis. The Scheme also provides that the employer must pay all of the grant received to the employee. Where employees are "furloughed" by administrators how might the administrators ensure that those  employees are paid in priority to other claims against the Company. The legislation provides that administrators may make distributions to creditors in accordance with the statutory basis (s175 of the Insolvency Act 1986). Whilst it was noted that payments to post-administration creditors were not "distributions", Mr Justice Snowdon referred to the potential applicability of Paragraph 66 of Schedule B1 as an appropriate way for the Joint Administrators to deal with any issues that might arise through the implementation of the Scheme including payments to "furloughed" employees. He did not however express any concluded view of the applicability of Paragraph 66.

Following quickly on the heels of the Carluccio's decision, the joint administrators of Debenhams last week also sought a declaration, similar to that obtained in the Carluccio's case (Mr Geoff Rowley of FRP Advisory LLP is an administrator in both administrations), namely that the contracts of employment of staff at Debenhams who had been "furloughed" prior to the appointment of the administrators would not be "adopted" if the administrators continued to pay 80% of the furloughed employees' wages. However Mr Justice Tower's decision on 15 April to decline to declare that such contracts of employment had not been "adopted" puts the proverbial cat amongst the pigeons.

Indeed Mr Justice Tower said “I think it is likely that the participation by companies in administration in the JRS (ibid the Scheme) and the payment of equivalent amounts to furloughed employees… means that the contracts of employment… will have been adopted by the administrators,” An appeal may be likely but until then with a (pre-furlough) wage bill of approx. £18m per month it appears that some or all of the furloughed employees could now face redundancy and how much of a blow that will be to the administrators' objective to rescue the Debenhams business in the months to come after the lockdown restrictions are eased, only time will tell.

Debenham's decision might be considered a blow to the Scheme and the Chancellor's aims to save businesses but it might equally be vindication for the Chancellor's statement last week "We won't be able to save every business"

If you want to know more please get in touch with John Gallacher at john.gallacher@morton-fraser.com or 0141 303 7111