Carluccio's Ltd, Re Insolvency Act 1986

In an administration, an employment contract is not adopted merely because it remains un-terminated for more than 14 days. Adoption requires conduct by the administrator amounting to an election to treat the contract as giving rise to liabilities with super-priority under paragraph 99(5) of Schedule B1.

A furloughed employee’s contract may be adopted even though the employee performs no services. An application under the Coronavirus Job Retention Scheme or payment under the varied contract may constitute adoption. Silence does not ordinarily amount to acceptance of a contractual variation, particularly where the employee cannot work, little time has passed, and the employer’s letter requires positive agreement.

The company operated a chain of restaurants and entered administration after COVID-19 restrictions forced its branches to close. The joint administrators sought directions concerning the proposed furloughing of employees under the Government’s Coronavirus Job Retention Scheme.

The Variation Letter offered employees continued employment on reduced pay limited to the grant received under the Scheme. Some employees accepted, some rejected the offer, and others did not respond. The court considered whether the contracts had been validly varied, whether they would be adopted under paragraph 99(5) of Schedule B1, whether paragraph 66 could authorise payments, and whether the administrators owed duties to apply for grants or preserve the employment contracts.

1. Variation of contracts. The Variation Letter validly varied the contracts of employees who expressly accepted it. Employees who rejected it would be made redundant. The non-responding employees had not consented: their inability to attend work, the short period since the letter, the requirement for positive agreement, and the possibility that they had not received or considered it prevented a clear inference of consent.
2. Adoption under paragraph 99(5). Paragraph 99 is the specific provision governing wages and salary in an administration and cannot be overridden by the general power in paragraph 66. The absence of services does not make paragraph 99 inapplicable. Parliament used the concept of adoption of the contract, not actual services rendered, and the rescue purpose of the insolvency legislation supported an interpretation capable of accommodating furlough.
3. Adoption requires conduct by the administrator amounting to an election to treat the continued contract as giving rise to a separate, priority liability. Mere continuation or non-termination is insufficient. This applied to the unvaried contracts of non-responding employees, who therefore remained unsecured creditors unless and until their contracts were adopted.
4. For consenting employees, adoption of the varied contracts would occur when the administrators applied under the Scheme or paid wages under those contracts. The same applied to employees who accepted the variation late, although late acceptance itself was not an act of the administrators and therefore did not amount to adoption.
5. The administrators were under no duty to apply for grants for objecting employees or non-responding employees whose contracts had not been varied. The court expressed no concluded view on the possible supplementary use of paragraph 66.
6. The administrators were directed and declared at liberty to act on those bases, subject to any later legislation or regulations and without prejudice to arguments that affected employees might subsequently raise.