CONSTRUING THE CORONAVIRUS REGULATIONS: THE “RESCUE CULTURE”

The fact that the judgment in Carluccio’s Ltd, Re Insolvency Act 1986 [2020] EWHC 886 (Ch)  was delivered on the morning of a bank holiday says a lot in itself.  Mr Justice Snowden was called upon to construe aspects of the Coronavirus Job Retention Scheme and pre-existing insolvency legislation.  It is important that we look at the general approach of the court to marrying pre-existing legislation to (largely unpublished and incomplete) Coronavirus regulations.

 

THE FACTS

Carluccio’s is a restaurant chain. It has entered administration, it is unable to trade because of the coronavirus restrictions.  The administrators wanted to be in a position whereby they could place staff on furlough, thus increasing the chances of selling the business as an ongoing concern.

THE DIFFICULTIES FACING THE ADMINISTRATORS

These were explained by the judge.

  1. The Administrators’ difficulties arise because although the Scheme has been explained by the Government in broad terms in guidance published online, there has been no precise detail given of its legal structure, and specifically how the Scheme is intended to operate consistently with the insolvency legislation.
  2. The urgency arises because the Administrators need to make their decisions in relation to the employees on or before Easter Monday 13 April 2020. That is the last day of the initial “safe” period of 14 days under the Insolvency Act during which the actions of the Administrators will not amount or contribute to the adoption of any contracts of employment.
  3. Accordingly, in broad terms, the Administrators’ application sought my determination of a number of questions of law in order to give them the assurance that if they act on the basis of those determinations they cannot subsequently be accused of having acted inappropriately in dealing with the employees and making applications under the Scheme.

THE APPROACH OF THE COURT TO THESE ISSUES

  1. The alternative course would have been simply to leave the Administrators to follow the best advice of their lawyers, and to leave any judicial consideration of the issues until after publication of the detailed legislation giving effect to the Scheme when a case could be brought on with representative parties. It is clear, however, that the Administrators and employees do not have the luxury of time to follow that alternative course. It is obvious that, if at all possible, the Administrators should be able, without fear of subsequent criticism, to take advantage of the benefits of the Scheme by placing the Company’s employees on furlough as soon as possible, provided that they believe that to be in the best interests of the administration.
  2. Accordingly, I considered that the court should do what it could to give a view of legal issues to assist the Administrators. 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. 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 PAUCITY OF INFORMATION IN RELATION TO THE FURLOUGH SCHEME

The judge noted the absence of detailed guidance on the furlough scheme.

No draft legislation or regulations have yet been published in respect of the Scheme. The details of the Scheme which are known to date are contained in on-line guidance from the Government at https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme (the “Scheme Guidance”) which was first published on 26 March 2020 and updated on 4 April 2020 and then on 9 April 2020 after the conclusion of the hearing before me.

CONSTRUING THE EXISTING LEGISLATION AND CORONAVIRUS: THE “RESCUE CULTURE”

The judge considered arguments that the existing insolvency legislation did not apply.  The situation had to be viewed through the prism of the insolvency legislation giving rise to a “rescue culture”.

  1. Moreover, even in normal circumstances not involving COVID-19 or furlough, there are situations in which an administrator might, without committing any breach or repudiation of an employee’s contract of employment, not require the employee to work for a period during the administration, but where it would nevertheless be entirely appropriate for the administrator to be required to continue to pay their wages or salary. To give one example, take an employee who has particular skills or know-how regarding the company’s business which would, if available to a competitor, devalue the business which the administrator was seeking to sell. Even if there was no new work for the employee to do in the administration until it was known whether the business could be sold, it would be commercially important for the administrator not to terminate the employee’s contract. In that way, the employee would continue to be available to the purchaser of the business, the restrictive covenants in his contract would continue in effect, and the maximum post-termination period of restraint would be available for the potential benefit of the purchaser. Given those benefits to the administration, even if, with the permission of the administrator, the employee were not required to attend the premises to work, it would be wrong if they were not entitled to payment of their wages or salary.
  2. Moreover, although the coronavirus and the concept of furlough were obviously not foreseen by Parliament when it enacted and amended the relevant insolvency legislation, or by the House of Lords when Paramount was decided, it is very clear from Lord Browne-Wilkinson’s speech at pages 441-442 and 445C-D that promotion of the rescue culture is an important consideration when interpreting the Insolvency Act. In the instant case, a conclusion that because furloughed employees could not provide services, their contracts of employment could not be adopted under Paragraph 99(5) would have the unwelcome result that the main statutory provision dealing with the issue of employment in administrations would have no application and would not enable furloughed wages or salary to be paid as the Scheme plainly envisages. 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.
  3. I therefore see no reason whatever to strive to reach a conclusion that Paragraph 99(5) is wholly inoperable in the current situation. Instead, if it is possible to do so, Paragraph 99(5) should be interpreted to permit the Scheme to be given effect, and thus support the rescue culture and the Government’s efforts to deal with the economic consequences of the COVID-19 pandemic.