News & Insights

Insolvency and the furlough scheme

Christian Meredith evaluates a Court of Appeal decision concerning liabilities of an administrator for furloughed employees.

The case concerned the administrators of Debenhams who appealed against a High Court decision in relation to potential liabilities for employees who had been furloughed under the government’s coronavirus job retention scheme.

In the months prior to the outbreak of COVID-19, Debenhams had been financially struggling. Towards the end of March, 13,000 employees were contacted to advise them that they would be furloughed. A further number were furloughed between this first band and when the administrators were appointed on 9 April 2020. The administrators made an urgent application to the High Court to seek clarity on whether they would have to adopt the employment contracts of these furloughed workers.

The High Court response was significant as it would determine the priority status of the employees. If the employment contracts were adopted, employees would receive ‘super-priority’ status regarding their wages. This would place them above other creditors – something the administrators were keen to avoid.

The High Court decision stated that if the administrators paid sums received under the furlough scheme to the employees who were furloughed at a time before the company went into administration then the administrators have effectively ‘adopted’ the employment contracts of the employees.

A similar conclusion was drawn from the Carluccio’s case we reported on last month (see below) which was essentially the first case to consider how furlough links with insolvency. However, the major difference in that case was that the employees had not been furloughed at the time the administrators were appointed.

Administrators for the retailer challenged this decision, but the Court of Appeal supported the High Court. The Court of Appeal agreed that the administrators had adopted the contracts as they had continued to pay the wages of the employees within the framework of the scheme rules. Further the employees who were furloughed accepted their continuation of employment and were bound by their contracts. As a final point, the appeal judge felt that by paying the furloughed employees’ wages, the administrators were acting with the objective of rescuing the retail store which was in the interest of the creditors as a whole. The judge at the hearing stated that it would not be possible for the administrators to participate in the scheme without treating the employment as continuing and that it would be against the purpose of the scheme if the employees were not retained.

The Court of Appeal was satisfied that the administrators had clearly adopted the contracts of the furloughed employees and the administrators had to pay the employment salaries as a priority. We will keep you updated of any further developments.