20th Apr 2020

One of the many consequences of the Government’s COVID-19 strategy has been the closure of restaurants and bars which in turn has forced a number of restaurant businesses into administration.

One of the businesses affected is Carluccio’s Limited (“Carluccio’s”).

All of the restaurants operated by Carluccio’s have been closed since 16 March 2020, the date of the advice provided by the Government that all restaurants should close. As a consequence, Carluccio’s employees have been unable to work since that date.

An administration order was made in respect of Carluccio’s on 30 March 2020. The Administrators’ strategy is to mothball the business while at the same time try to sell it. As part of the strategy and to maintain value, the Administrators want to retain the employees.

The effect of paragraph 99 of Schedule B1 to the Insolvency Act 1986 is that liabilities for wages or salary arising out of contracts of employment adopted by an administrator are payable out of the assets held by the administrator in priority to the administrator’s remuneration and expenses and in priority over the claims of floating charge creditors and unsecured creditors. Nothing done in the first 14 days after the appointment of the administrator will amount or contribute to the adoption of such contracts.

Carluccio’s does not have sufficient funds to pay the employees’ wages and so to avoid having to make all employees redundant in order to avoid the effects of paragraph 99 of Schedule B1, the Administrators invited the employees to agree to a variation of their contracts of employment by agreeing to accept reduced pay. The employees were invited to agree to accept pay reduced to the sum actually recovered by Carluccio’s for each employee under the proposed Coronavirus Job Retention Scheme (“Scheme”).

The employees were asked to confirm their agreement to the variation by email by 3 April 2020, in the absence of any response the employees were warned that they may be made redundant.

By the deadline, 1,707 of the 1788 employees who had received the letter accepted the variation, 4 rejected it and 77 had not responded.

The Administrators sought directions. The Administrators concerns included: (a) whether the letter to the employees actually varied the contracts of employment; (b) if the variation was valid, what was the effect on the consenting and non-responding employees?  And (c) how could the Administrators make payments to the employees in priority to other claims against Carluccio’s.

Mr Justice Snowden gave judgment on 13 April 2020 (Re Carluccio’s Ltd (in administration) [2020] EWHC 886 (Ch)). The background set out above is taken from the judgment.

The validity of the variation, the effect on the consenting and non-responding employees and the adoption of contracts

Mr Justice Snowden held that for the employees who had consented to the variation, such variation was valid. The variation means that Carluccio’s cannot be liable for wages or salary exceeding the amount received by Carluccio’s under the Scheme in respect of the employee and is not obliged to pay the employee before receipt of the funds.

The employees who have rejected the variation will be made redundant and their employment contracts terminated.

However, in respect of the non-responding employees, Snowden J held that a variation cannot, on the facts of this case, be inferred.

In those circumstances and left there, one would assume that out of an abundance of caution the Administrators might have considered making non-responding employees redundant. However, the problem only arises on the adoption of the contract of employment by the Administrators.

After a careful review of the authorities Snowden J held that adoption of such a contract requires some conduct on the part of an administrator amounting to an election to give super-priority to the employee’s claims for wages and salary. Adoption does not happen by the mere continuation or non-termination of the contract of employment.

Applying the reasoning to the case Snowden J considered at what point the contracts of employment of consenting and non-responding employees would be adopted by the Administrators.

For consenting employees, they were now employed under terms of the varied contract, those terms including being paid only the sum received under the Scheme and only when that sum was received. The variation had taken place within the 14-day period and nothing had been done to adopt the varied contract. It is only when the Administrators make an application under the Scheme or make any payment to the employees under their varied contracts, that the Administrators can be said to have adopted the varied contracts of employment and only then do those contracts qualify for ‘super priority’.

For non-responding employees who continue not to respond, they will continue to be employed on unvaried contracts, but their contracts will not be adopted where the Administrators do nothing amounting to an election to treat the contracts as qualifying for ‘super-priority’.

For non-responding employees who consent after the expiry of the 14-day period, the Administrators will not be treated as having adopted the unvaried contracts simply because they have not terminated those contracts prior to the expiry of the 14-day period. The consent will be treated as varying the contract but again the Administrators will not have adopted the varied contracts.

Adoption will only occur when the Administrators make an application under the Scheme or make any payment to the employees under their varied contracts.

The ability to make payments to the employees

The difficulty for the Administrators was whether they could legitimately pay employees in priority to other claims. The Scheme guidance does not provide that money paid to a company from the Scheme is held on trust and so the payment could only be justified if there was a mechanism allowing payment under the Insolvency legislation.

Mr Justice Snowden held that at the point of adoption of the employees’ contracts, that is on the making of an application to the Scheme or payment to the employee, the employee qualifies for super-priority under paragraph 99(5) of Schedule B1 of the Insolvency Act 1986 and so payment can legitimately be made to the employees.

The effect of the judgment is that the Administrators can retain the employees, and therefore maintain value in the business without having adopted the contracts of the employees.

The case was decided before any detailed legislation has been enacted in relation to the Scheme.

John Vickery
April 2020

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