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Law360, London (April 14, 2020, 3:43 PM BST) -- Employees of the insolvent Italian restaurant chain Carluccio's will be furloughed after a London court issued a landmark ruling giving administrators permission to tap into a government scheme to cover wages for businesses devastated by the coronavirus pandemic.
The High Court has signed off plans to push some 1,700 Carluccio's employees into a furlough scheme after restaurants were forced to close their doors. (AP)
The government program announced last month was designed to prop up businesses unable to earn money as a result of strict lockdown protocols. But the plan gave few, if any, details of what to do if a company slides into insolvency, when administrators in charge of its finances have a conflicting duty to preserve assets for creditors.
The decision was rushed through for Easter Monday so administrators could avoid liability for employees' contracts and wages. That left the restaurant workers, almost all of whom supported the plans, unable to attend.
"The COVID-19 pandemic is a critical situation which carries serious risks to the economy and jobs in addition to the obvious dangers to health," Judge Snowden said.
"I think that it is right that, wherever possible, the courts should work constructively together with the insolvency profession to implement the government's unprecedented response to the crisis in a similarly innovative manner," the judge added.
The ruling could open the door for other companies teetering on the edge of administration to seek similar decisions, potentially saving jobs lost under normal bankruptcy proceedings.
The government's furlough scheme was announced by Chancellor of the Exchequer Rishi Sunak on March 20.
But attorneys for administrators criticized the plan's legal framework, arguing that there was no bulletproof route map for companies to join after they had started the insolvency process.
A trade union that intervened to argue on behalf of employees, Unite the Union, said the ruling was the first legal test of the government's scheme and could serve as a blueprint for saving jobs.
"The new job retention scheme was put together in record time and its interaction with other areas of law — in this case insolvency law — needed to be looked at by the High Court," union executive Howard Beckett said. "This important decision ensures that no one is left behind in a hospitality sector reeling from the effects of the shutdown."
Some 1,700 of the 1,800 or so affected employees of Carluccio's backed furloughing. But nearly 80 did not reply, leading attorneys for FRP Advisory, the administrators, to argue both for and against their proposal.
Workers who didn't reply will still have a chance to vary their employment contracts to take part in the furlough plans, and those who do not reply will still be employed — unless administrators terminate their contracts. Insolvency laws give administrators 14 days to order staff redundancies, otherwise they become liable for their employment and salaries.
The decision will help administrators entice prospective buyers for the business, which operates some 70 chains across the country.
The fate of Carluccio's became unclear after it announced last month that it didn't have enough money to continue paying workers.
The court's furlough order means a prospective buyer can snap up the business at a discount, with a full workforce, without having to rehire staff that had been let go.
Lawmakers envisioned functioning employers applying to the government, with claims being paid in the form of grants deposited in their bank accounts, according to the judgment. From there, the company would remit wages to employees, who would be barred from returning to work for the duration.
But under the scheme the grants counted as income, which under normal circumstances administrators were obliged to preserve for creditors, according to the judgment.
Yet it's not unheard of for administrators to continue to pay employees without requiring them to work, if letting an employee go would undermine the value of a business up for sale, Judge Snowden said.
The judge also upheld varied contracts agreeing to the terms of the furlough, signed by employees, despite concerns that administrators couldn't adopt the written agreements under insolvency rules.
"That would be entirely contrary to the rescue culture in the current situation in which such an approach may be needed more than ever before," the judge said.
The administrators are represented by Felicity Toube QC and Madeleine Jones of South Square, instructed by Ashurst LLP.
Unite the Union is represented by Oliver Segal QC and Stuart Brittenden of Old Square Chambers, instructed by Thompsons Solicitors LLP.
The case is In the Matter of Carluccio's Ltd., case number CR-2020-002051, in the High Court of Justice of England and Wales.
--Editing by Alyssa Miller.
For a reprint of this article, please contact reprints@law360.com.
