Can a company in administration use Job Retention Scheme?
The High Court has given some helpful advice about whether a company in administration can place its employees in the government’s Job Retention Scheme.
The issue arose in the case of the Carluccio's restaurant chain, which went into administration on 30 March.
The administrators of the chain applied for directions on whether the company’s employees could be placed in the Scheme, which enabled employers to furlough employees whose services could not be used because of the Covid-19 pandemic.
No draft legislation or regulations had been published, but details of the Scheme were contained in government guidance published on 26 March and later updated.
The Scheme provided government funding to cover the cost of continuing to pay employees 80% of their regular salary, up to a maximum of £2,500 per month. The company had closed its branches on March 16 following the closure of public places as part of government strategy to reduce the spread of Covid-19.
The administrators wished to "mothball" the business, retain the employees under the Scheme, and seek a sale. They wrote to the employees offering furlough (the variation letters). Most accepted, but some did not respond.
The administrators were concerned that, although HMRC guidance explained the Scheme in broad terms, there was no precise detail of its legal structure and how it was intended to operate consistently with insolvency legislation.
They were only willing to retain the employees if the cost of continuing to pay them would be met by the Scheme and would not incur greater liabilities for the company.
They asked the High Court for directions. Due to the urgency of the matter, the case was heard remotely.
The judge pointed out that as it had not been possible to arrange for employees to be joined to the application, it was difficult to see how the court’s decision would bind them or the Government.
However, it was not possible to wait for detailed legislation giving effect to the Scheme. The court should therefore do what it could to give a view of legal issues to assist the administrators.
It held that in principle, the scheme was available to a company in administration. The Scheme Guidance indicated that administrators could access the Scheme "if there is a reasonable likelihood of rehiring the workers. For instance, as a result of an administration and pursuit of a sale of the business".
The administrators reported several expressions of interest from potential buyers and considered that a sale was likely and that the restaurants would be able to resume business when the trading restrictions were lifted. That aligned with the meaning of "rehired" in the Scheme Guidance.
The variation letters had validly amended the employment contracts of consenting employees and non-responding employees who might subsequently consent. The position regarding non-responding employees was less clear. Their silence or inaction could not safely be equated with consent because the letters expressly required a positive response to the proposed variation and warned that a failure to respond could lead to the employee being considered for redundancy. Very strong evidence would be needed to reach a conclusion that the absence of objection within a few days of sending a variation letter was to be equated to consent to be furloughed.
As for the application of the Scheme to the insolvency process, the Scheme Guidance made clear that it was the employer who claimed and received the government monies, not the employee. The monies were therefore company assets and administrators had to dispose of them in accordance with the priorities stipulated in insolvency legislation.
This meant that employees would therefore have super-priority ahead of the administrators' fees and expenses, floating charge creditors and unsecured creditors and payments could be made to them as and when the administrators received funds under the Scheme.
Please contact Jackie Cuneen if you would like more information about the issues raised in this article or any aspect of employment law.