Insolvency Court Directions Made To Facilitate Administrators' Use Of The UK Government's Furlough Scheme

• Published date: 12 May 2020
• Author: Ms Devi Shah, Michael Fiddy, Amy Jacks, Jessica Walker, Alexandra Wood, Sheena Frazer and Erica Arcudi
• Subject Matter: Employment and HR, Government, Public Sector, Insolvency/Bankruptcy/Re-structuring, Coronavirus (COVID-19), Insolvency/Bankruptcy, Employee Benefits & Compensation, Employee Rights/ Labour Relations, Government Contracts, Procurement & PPP, Employment and Workforce Wellbeing, Litigation, Contracts and Force Majeure
• Law Firm: Mayer Brown

A court¹ has approached the interplay between the Insolvency Act 1986 and the Government's furlough scheme so as to encourage and support the rescue culture and facilitate access to the scheme by administrators. It ruled that:

• employees consenting only to be paid the capped amount provided under the scheme could receive no more than the capped amount; and
• their contracts would be "adopted" by the administrators, so as to make their salary capped on this basis payable on a priority basis, on the earlier of the date of an application under the scheme or when payments are made to the employee following the receipt by the company of the furlough grant.

Background and issues raised

In his judgment on 13 April 2020, Snowden J provided the administrators of a company with directions concerning the basis upon which administrators might place a large number of the employees of the company on "furlough" pursuant to the Government's proposed Coronavirus Job Retention Scheme (the "Scheme").

The company, which operated a chain of Italian restaurants, entered administration on 30 March 2020 following the closure of the restaurants in compliance with the restrictions imposed by the Government in an effort to reduce the spread of COVID-19.

The administrators' strategy was expressed to be to "mothball" the company's business and, having received several expressions of interest, to seek a sale of some or all of the business. It sought to retain its workforce, but since the company had no money with which to pay continuing wages, it could only do so if it could take advantage of the Scheme.

The Scheme guidance² provides that it is available to companies in administration, but there must be a "reasonable likelihood of rehiring the workers", as might happen on a sale of the business. Soon after their appointment, the administrators had made an offer to place the employees on furlough pursuant to the Scheme and asked them to confirm that their pay would be reduced to the capped amount payable under the Scheme for the period of furlough leave and would only be paid if and when a grant was received.

Issues for the court's determination arose first, because the administrators sought assurance that the company's liability to employees had been limited by the variations proposed to their contracts, where they were accepted. Further, under the Scheme, the Government will pay any grant monies to the employer and not to the employee, and such funds are to be treated on receipt as...