Re Carluccio's Limited - something to dine out on?

It is fair to say that the Re Carluccio’s case was neither the first nor will it be the last case in which the High Court is asked to consider the issues arising – both from a legal and practical perspective – from the COVID-19 pandemic. Indeed, it is more likely to represent one of an inevitably growing line of jurisprudence emanating from the Courts over the coming weeks and months in which these issues are explored as more businesses get into difficulties. The case law will continue to unfold as the Government’s response to the COVID-19 pandemic evolves, and new measures are implemented to provide as much assistance as possible to employers, employees and self-employed persons alike, in the hope that the economic damage caused by COVID-19 can be minimised to the maximum extent possible and “UK plc” is in the healthiest possible position to rebound when the pandemic eventually comes to an end.

This article does not provide a detailed discussion of the facts or legal principles considered in Re Carluccio’s, rather it provides a headline overview and includes some practical considerations for employers and office holders taking up an administration appointment.

Briefly stated, the Re Carluccio’s case raised an interesting question after the company entered into administration in March 2020, shortly after the Government announced the Coronavirus Job Retention Scheme (colloquially known as "furloughing"). The question arose from the administrators’ desire take advantage of the benefit of that scheme and “mothball” the company, with the intention of fulfilling one of the statutory objectives which administrators are required to consider, in this case, the desire being to sell Carluccio’s to a prospective buyer as a going concern.

A letter was sent to employees of the company inviting them to agree to a variation of the terms of their employment in order to furlough all eligible employees on the basis that they would then receive 80% of their regular wages up to a maximum of £2,500, pursuant to the terms of the Government's Coronavirus Job Retention Scheme.

Of the employees of Carluccio’s, there were essentially three categories:

1. Employees who consented to the variation;
2. Employees who objected to the variation; and
3. Employees who did not respond to the letter at all.

The issue for the Court in relation to the consenting employees and objecting employees was straightforward; the consenting employees’ contracts of employment were varied in line with the terms of the letter sent out by the administrators and the objecting employees were deemed to have had their employment terminated and were thus deemed to be redundant. 

The question for the Court was the position in relation to the non-responsive employees, on the basis that their consent or objection could not be construed from their silence. Of particular note was the fact that the variation letter did not state that a failure to respond would be deemed to indicate the employee’s agreement to the proposal. This was important for the purposes of considering whether the employment contracts of the non-responsive employees were deemed to have been “adopted” by the administrators and necessary because employees whose contracts are deemed to be adopted, would be accorded “super priority” status within the administration, for the purposes of payment of their wages.

The administrators were keen to ensure that the existing contracts of employment of the non-responsive employees were not deemed to be adopted on this basis, which would ordinarily be the case if an administrator does not terminate a contract of employment, or any other contract for that matter, within the first 14 days after their appointment.

Helpfully, for the administrators, the Court confirmed that the contracts of employment of the consenting employees could in reality only be deemed to be adopted either where:

1. The administrators make an application under the Government furlough scheme in relation to those employees; or
2. A payment is made to those employees under the terms of the Government furlough scheme/the varied contracts.

The non-responsive employees who subsequently chose not to accept the variation would remain employed by the company on the terms of their unvaried contract until its termination.  However, the administrators were not under pressure to make a decision as to whether to terminate those contracts of employment within 14 days of their appointment.

Practical Advice for Employers and Administrators

From the point of view of an administrator, this will be a welcome judgment as it provides them with comfort that they are not “on the clock” to make critical decisions in relation to the contracts of employees of the company in administration within 14 days of their appointment.  That does not mean that they cannot, and should not, act promptly in relation to their engagement with the company’s employees as a class of creditors within the administration, particularly in light of the profound and ongoing negative effects of COVID-19 for individuals up and down the country, but especially those whose employment is at risk.

For employers, they will naturally wish to avoid placing the company into administration if at all possible, by seeking to “mothball” the company and taking advantage of as many of the Government loan and grant schemes as they possibly can.  Whilst these measures are not intended to benefit companies that were not viable prior to COVID-19, they are absolutely designed to protect those companies that were viable prior to COVID-19, and remain viable but for its implications.

As the legal and commercial ramifications arising from the COVID-19 pandemic continue to evolve on a daily (and, in some cases, hourly) basis, please do not hesitate to contact our experts in the Restructuring and Insolvency and Employment teams to help you navigate through these difficult times. The earlier and more proactive your engagement with us, the more options are likely to remain on the table for you to explore.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.