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Coronavirus – Implications of furlough for a company administration – UK

  • United Kingdom
  • Coronavirus
  • Coronavirus - Country overview
  • Coronavirus - Workforce issues

23-04-2020

Following hot on the heels of the recent judgment in the case involving a restaurant chain (see our Alert) we now have another High Court decision which considers how the government’s Coronavirus Job Retention Scheme (“CJRS”) applies in the context of a company in administration.

Coronavirus Job Retention Scheme explained

The CJRS was first announced by the Chancellor of the Exchequer on 20 March to help pay people’s wages during the COVID-19 pandemic. The legal framework for the CJRS is set out in a Treasury Direction (“the Direction”) published on 15 April. This is supplemented by government guidance (“the guidance”), which has been the subject of multiple revisions since it was first published on 26 March. See our Alert for an in-depth analysis of the CJRS.

In very simple terms, the CJRS enables UK employers to claim a grant from HMRC for employees who are placed on “furlough” (a temporary status whilst there is no work available for them to do) to cover 80% of their usual monthly wage costs, capped at £2,500 per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage. Each period of furlough must be for a minimum of three weeks duration and it is a condition of the CJRS that the employee does no work at all for their employer during that period.

Confirmation of furlough status should be made in writing to the employee and the guidance states that a record of this communication must be kept for at least five years, as a mandatory condition of the CJRS. Significantly also, the Direction states that an employee is deemed as furloughed for the purposes of the CJRS only if “…the employer and employee have agreed in writing (which may be in an electronic form such as an email) that the employee will cease all work in relation to their employment….”. Although the most recent version of the guidance suggests some helpful relaxation of that stance, such that the absence of an employee’s express written consent would not lead HMRC to reject otherwise legitimate CJRS claims, the position is still not completely clear. Other differences in approach between the Direction and the guidance have also been apparent until very recently, for example, what an employee’s entitlement to sick or holiday pay may be during furlough.

When can administrators place employees on furlough? 

When a company goes into administration, there is a 14-day window for the administrator to decide whether to retain or dismiss employees, beyond which they are taken to have "adopted" the employees’ contracts of employment (within the meaning of paragraph 99(5) of Schedule B1 of the Insolvency Act 1986). If contracts are adopted, wages or salary due under them are payable in priority over the administrators' fees and expenses and the distribution of assets to floating charge and unsecured creditors – known as “super-priority”.

The government’s guidance expressly states that administrators will be able to access the CJRS where “there is a reasonable likelihood of rehiring the worker.” However, the guidance is silent on how administrators should utilise CJRS grant funds to pay those wage costs within the context of existing insolvency laws. In the restaurant chain case, the High Court offered clarification by directing that, once applications for funding under the CJRS have been made by the administrators and sums arising from this paid to employees who have agreed to be furloughed, the administrators will be taken to have “adopted” the contracts of employment, for the purposes of the employment protection aspects of insolvency.

Importance of employee consent to being furloughed

The directors of a well-known department store chain appointed joint administrators on 9 April 2020. This was because their ongoing trading difficulties had been exacerbated by the COVID-19 pandemic to the extent that all shops were now closed.

In contrast to the earlier case where the question was whether administrators were able to place employees on furlough, in this case the vast majority of the department stores’ 15,550 employees had already been furloughed in the two-week period prior to the administrators’ appointment. Each furloughed employee had been told they would receive 80% of their usual monthly wages up to the cap of £2,500 per month, but no additional amounts would be paid to “top up” those entitlements (this being permitted, but not required by the CJRS). However, the furloughed employees were not asked if they consented to the furloughing arrangements.

On their appointment, the administrators decided to take the precautionary step of seeking express consent from all furloughed employees to avoid any doubts arising as to what had been agreed regarding their changed status and the associated pay reduction. Letters were emailed to 13,070 furloughed employees and, by the date of the High Court hearing on 15 April, consents had been received from just over 12,700 employees, with just four objections and 359 employees who had failed to respond.

High Court judgment on Job Retention Scheme

The administrators were keen to pursue a rescue plan for the department store chain. However they contended that, contrary to what had been decided in the previous case, i.e. that an administrator’s liability was limited to any sums which would be reimbursed via the CJRS, they also risked being exposed to “super-priority” liability for wages over and above the CJRS grant-level. Submissions were also made about their potential liability for holiday and sick pay, given the lack of clarity in the guidance at that time. At the hearing the administrators estimated their potential exposure for such liabilities at over £3 million per month, although Trower J noted this total was subject to a “substantial reduction” because of the number of furloughed employees who had already consented to a variation of their contractual terms by that date.

In short, the administrators sought directions to the effect that the contracts of the furloughed employees would not be adopted by them simply because both:

  • those employees remained furloughed
  • the administrators took no further action in relation to the employees apart from “issuing such communications as may be required to confirm the terms of the employees’ ongoing engagement and to seek any required consent in relation to such terms and to pay to the furloughed employees amounts that are to be reimbursed to the Company through its participation in the Coronavirus Job Retention Scheme”

In heavy reliance upon the previous decision, Trower J declined to make such directions, instead directing that the administrators will be taken to have adopted the contracts in circumstances where, at any time after 14 days from the time of their appointment, they either:

  • cause the company to make payments to employees in accordance with their contracts of employment, including amounts to be reimbursed to the company under the CJRS
  • make an application in respect of such employees under the CJRS

What does this judgment mean for administrators?

It is now clear that administrators are able to access the CJRS. However, the guidance states it expects an administrator will only do so if there is a reasonable likelihood of rehiring the workers. In our view, administrators therefore need to be comfortable that staff can be retained pending a sale or restructuring of the business. In our view, CJRS will not cover a situation where the business is, effectively, unable to be saved.

For administrators, the practical consequence of this latest decision (reaffirming the earlier decision) is that the employment contracts of those employees who agree to be placed on furlough are treated as having been adopted (within the meaning of paragraph 99(5) of Schedule B1 of the Insolvency Act 1986) once the administrators make a claim under the CJRS or make any payment to the employee in respect of their employment. In the absence of an appeal, or further statutory guidance, the two cases leave no room for doubt on this point. The adoption of the employment contracts makes wages and salary due under those contracts, during the administration, super-priority creditors in the administration.

The objective for administrators, therefore, must be to limit the cost effects of this super-priority. The administrators need to ensure that they have properly varied the employment contracts not just to enable furloughing, but also to vary the amount the employee is due from the company in administration, to limit this to sums recoverable under the CJRS. The administrators of the restaurant chain achieved this in advance of furloughing; the department store chain's administrators did so retrospectively following their appointment.

Note that in both cases, the court determined the administrators had successfully limited the company’s liabilities to sums recovered under the CJRS for employees who consented to furloughing. For employees who objected to furloughing or didn’t respond, it appears their employment contracts are not adopted and thus any claims they may have will be unsecured claims of the company.

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