Article
The Similar Sequel: Re Debenhams Retail Ltd [2020] EWHC 921 (Ch) following Re Carluccio’s Ltd [2020] EWHC 886 (Ch)
Background According to the Enterprise Research Centre, 21,000 more UK businesses collapsed in March 2020 compared with a year ago. With the uncertainty for businesses in the current Covid-19 crisis, the High Court decided that it should assist the insolvency profession. In absence of representative employees, it has recently handed down two non-binding decisions in response to urgent applications from high street brands. In Re Carluccio’s Ltd [2020] EWHC 886 (Ch), for the purposes of paragraph 99, Schedule B1 of the Insolvency Act 1986, the Court decided when an employment contract would be ‘adopted’ where administrators use the Coronavirus Job Retention Scheme (“CJRS”). Under paragraph 99, where an employment contract is adopted (with no act within the first 14 days of the administrator’s appointment amounting to an adoption), liabilities under it qualifies as a super-priority in the administration, above the administrator’s remuneration, expenses and other creditors. After their appointment on 30th March 2020, the Administrators sent out variation letters to most of the company’s employees, seeking agreement for their participation in the CJRS by 3rd April 2020. By 7th April 2020, whilst most had consented, a number had objected or not responded. With the 14 day ‘safe period’ under paragraph 99 ending soon, the Administrators were keen to understand: how to lawfully give effect to the furlough arrangements with consenting employees; and whether they could avoid the adoption of the unvaried contracts so that they need not make the non-responding employees redundant before the end of the ‘safe period’. The High Court held that: 1. An offer to place an employee into the CJRS, once accepted, constituted a variation of the employment contract. 2. A mere failure to terminate an employee’s contract within the 14 days will not automatically lead to adoption. For consenting employees, their varied contract will be adopted when the Administrators engage in conduct that amounts to an election to treat the contract as giving rise to a separate liability, such as making an application in respect of the employee under the CJRS, or paying the employee’s salary (Powdrill v Watson & Anor (Paramount Airways Ltd) [1995] 2 A.C. 394). This was irrespective of furloughed employees not rendering services or unilateral attempts to exclude adoption within the variation letter. 3. For objecting employees, their current contracts will not be considered varied or adopted and would likely be terminated by redundancy. For non-responding employees, if they consented within the 14 days or belatedly thereafter, assuming the variation letters had not been withdrawn, they will be in the same position as the consenting employees. Otherwise, they will continue to be employed under their unvaried contract until it is terminated, but it will not be adopted where they do not work and the Administrators do nothing to amount to an adoption.
18 HAMPSHIRE LEGAL
Re Debenhams Retail Ltd [2020] EWHC 921 (Ch) concerned similar circumstances. However, the directors had placed most employees on furlough prior to administration and had not sought consent. On 10th April 2020, the day after the Administrators were appointed, variation letters were sent out asking employees to agree, which most consented to by the date of the hearing. The Administrators challenged Re Carluccio’s and sought a declaration that if they merely kept employees on furlough and paid their salaries, the contracts would not be adopted. Decision The High Court held that: 1. Re Carluccio’s should be followed and so after the initial 14 days, where a company made payments to an employee, or made an application in respect of that employee to the CJRS, their contract will be adopted. 2. A company that furloughed employees before administration and kept them on furlough, with payments merely being made to them pursuant to the CJRS, would not avoid adoption (Paramount Airways Ltd). This was irrespective of the intentions of administrators. 3. Payments to employees by way of reliance on paragraph 66, Schedule B1 of the Insolvency Act 1986 would not circumvent the adoption of such contracts. Commentary 1. Administrators will welcome the consistency of these two decisions, dealing with circumstances in which employees have been furloughed before and after administration. This is especially considering the understandable lack of detail as to how the CJRS should operate with insolvency legislation. 2. However, whilst these decisions are not binding, administrators may be concerned that they represent a widening of the meaning of ‘adoption’ within paragraph 99, beyond the CJRS. This is particularly with regards to making payments to employees. 3. In these two cases, most employees consented to the variation letters with respect to the CJRS. For administrators to minimise the risk of potentially adopting liabilities under unvaried employment contracts, for non-responding employees, it is advisable for consent to be sought as quickly as possible. In this same respect, administrators and employees should remain alive to new developments in these exceptional times. ■
Edward Bates
Second Six Pupil Barrister 5 Pump Court Edward is a Second Six Pupil Barrister at 5 Pump Court. Prior to coming to the Bar, he worked in academia as a Lecturer-inLaw and Co-Director of the LLB Programme at City, University of London. He is also a Chartered Management Accountant (CGMA, ACMA) and started his professional career in Management Consulting at KPMG LLP.
