COVID-19: Administration Developments

20.04.2020

As the economic fallout of the current health crisis continues to impact negatively on the business sector, more and more companies find themselves facing Administration. This bulletin looks at two areas where practitioners dealing with this particular insolvency regime might find some welcome clarity and guidance.

Barnaby Hope looks at recent decision in Re Carluccio’s Ltd [2020] EWHC 886 (Ch) concerning the Coronavirus Job Retention Scheme in the context of Administration.

Isabel Petrie reviews the clarifications to the regime for dealing with out of Court appointments brought in by the Temporary Insolvency Practice Direction.

Should you wish to discuss any of these topics, or raise any other queries, do not hesitate to contact either the clerking team (+44 (0)20 7420 9500 or clerks@selbornechambers.co.uk) or any member of Chambers. Please rest assured that Selborne Chambers remains fully operational and very much open for business.

Mark Warwick QC

 

Re Carluccio’s Ltd (in administration) [2020] EWHC 886 (Ch)


Introduction

This is a summary and analysis of the first known reported case regarding the Government’s Coronavirus Job Retention Scheme (“the Scheme”), under which, in summary, employers may claim by grant from HMRC 80% of the regular salary of employees who cannot work but are still kept on the payroll, up to 80% of £2,500pcm (“the Scheme”). Employees placed on this scheme are known as having been ‘furloughed’. Snowden J (“the Judge”) was ruling on an urgent application (heard remotely) by administrators of Carluccio’s Ltd (“the Company”). The (“the Administrators”) sought directions from the Court regarding the Scheme.


Facts

As a result of financial difficulties exacerbated by the coronavirus outbreak, the Company entered administration on 30 March 2020. The Administrators wished to achieve a sale of business and retain the Company’s employees. The Scheme was open to companies in administration, but Government Guidance stated that it should only be accessed if there was a “reasonable likelihood” of rehiring the workers, which the Administrators contended there was

Shortly after their appointment, the Administrators wrote to many of the Company’s employees (“the Variation Letter”). It sought the employees’ agreement by 3 April 2020 to being furloughed (see §1 above), failing which the Administrators would consider the possibility of making the employee redundant [24 – 28]. Most of the employees agreed (“the Consenting Employees”); some did not (“the Objecting Employees”) and some had not responded (“the Non-Responding Employees”) [29].

The matter was urgent because after 14 days had elapsed since the Administrators’ appointment, there was a risk that they could be taken to have adopted the Contracts under paragraph 99 of Schedule B1 to the Insolvency Act 1986 (“Schedule B1”).


Issues

How the Scheme Operated in an Insolvency Process

The Judge confirmed [37 – 41] that if the Administrators adopted a Contract of a furloughed employee under §99, the employee would have ‘super priority’ under §99. If not, they would be unsecured creditors.

 

Variation of the Employment Contracts

The Variation Letter had the effect of varying the Contracts of the Consenting Employees as stated in the letter and terminating the Contracts of the Objecting Employees following their redundancy [44 – 45]. the Judge held that he could not make a finding of variation regarding the Non-Responding Employees [46 – 54].

 

Adoption of the Employment Contracts – Principles

The Judge then proceeded to consider whether adoption had occurred, referring to Powdrill v Watson & Anor (Paramount Airways Ltd) [1995]2 A.C. 394 (“Paramount”). His analysis was [84 – 85] that mere failure to terminate an employment contract within the 14-day period did not give rise to adoption; there needed to be some conduct of the administrator amounting an election.

 

Adoption of the Employment Contracts – Conclusion

As to the Consenting Employees, the Judge held [90 – 92] that the Contracts would be adopted when the Administrators applied under the Scheme in respect of the employee, or made a payment to them under the varied Contracts. The Objecting Employees’ Contracts had not been varied; they were liable to termination following their redundancy [97].

The Non-Responding Employees’ position was akin to the Consenting Employees if they later consented: adoption would occur when the Administrators took either of the steps mentioned above [98 and 101]. If the Non-Consenting Employees did not respond, the Administrators by mere inaction would not be taken to have adopted the Contracts [100].

 

Duty to Apply under the Scheme

At [103 – 110, in particular 107], the Judge indicated that the Administrators were only under a duty to apply under the Scheme in respect of Consenting Employees.

 

Practice Points

This decision brings welcome clarity for those involved in administrations and takes some of the pressure off administrators in the 14-day period post-administration. However, it is important to note that, as the Judge stated [7], this decision was the Judge’s view for the benefit of the Administrators and might not be legally binding, as the employees and Government had not been joined to the proceedings.

 

It will be crucial for administrators to:

(i) Draft letters akin to the Variation Letter to employees carefully so that no doubt can remain as to the consequences of acceptance or rejection of its terms.

(ii) Ensure that, if possible, receipt of the letters can be tracked (if postage, by recorded delivery, provided it is not unduly expensive; if electronic, by seeking read receipts on emails). This will assist the administrators’ position insofar as there is a live dispute as to whether an employee has consented impliedly or by conduct.

 

It is likely that there will be further reported caselaw where employees who have not responded later seek to be placed in the position of “super-priority”, which will involve a more detailed consideration of variation of employment contracts and adoption under s99 of Schedule B1. As is often the case, well-drafted legislation could clarify the potential issues arising in this regard.

 

Regime dealing with out of Court appointments under Schedule B1of the Insolvency Act 1986 (“the Act”):

 

Introduction

Last week I provided an overview of the new developments brought about by the Temporary Insolvency Practice Direction (“TIPD”), which came into force on 6 April 2020, covering range of procedural matters. This week I will look in detail at one particular aspect, paragraph 3 TIPD, the regime dealing with out of Court appointments. This clarifies the position in relation to various Notices CE-filed with the Court “out-of-hours”.

 

Paragragh 3.2 sets out the Notices to which the new regime applies:

(i) Notice of Intention to Appoint an Administrator (“NOI”) filed by a company or its directors under Paragraph 27 of Schedule B1;

(ii) Notice of Appointment of an Administrator (“NOA”) filed by a qualifying floating charge holder (“QFCH”) under paragraph 18 of Schedule B1;

(iii) NOA by a company or its directors under Paragraph 29 of Schedule B1.

 

The Authorities

The TIPD follows a series of conflicting recent decisions where the Court has been invited to remedy administration appointments or confirm whether appointments have been valid and effective in circumstances where the Notices were CE-filed outside court opening hours. Given the context, the Court often finds itself considering the validity of these Notices against the backdrop of Practice Direction: Insolvency Proceedings (“PDIP”), Practice Direction 51O (The Electronic Working Pilot Scheme) and the Insolvency Rules 2016 (“IR”), on an urgent basis. This has unfortunately resulted in some confusion arising from the authorities, briefly summarised here:

(i) (24 January 2019) in Re HMV Ecommerce Ltd [2019] EWHC 903 (Ch), Barling J held that an NOA CE-filed by directors at 5.54pm (after hours), notwithstanding para 8.1 PDIP, was valid and took effect from the time of filing;

(ii) (5 October 2019) in Re Skeggs Beef Ltd [2019] EWHC 2607 (Ch) Marcus Smith J doubted the HMV He held that an out of hours NOA CE-filed by a QFCH was not effective (since there had not been compliance with IR 3.20-3.22, which took precedence over PD51O). The Judge did however go on to waive this defect and declared that in this case the NOA was valid and took effect from the time of filing;

(iii) (18 October 2019) in Re Henderson & Co Ltd [2019] EWHC 2742 (Ch), ICCJ Burton considered NOAs and NOIs CE-filed outside court hours. The Judge was not referred to the (recently decided and at the time unpublished) decision in Skeggs. She held that NOIs would take effect from the time that they were filed, while the NOAs filed by directors or companies would take effect when the Court opened next;

(iv) (11 November 2019) in Re Keyworker Homes (North West) Ltd [2019] EWHC 3499 (Ch), Hodge J construed the wording of Sch.B1 para 28(2) namely the period of ten business days. He made some obiter remarks casting doubt on aspects of the previous decisions and considered that NOAs by directors or companies would take effect from the time of filing even if out of hours, whereas Notices by QFCHs were subject to IR 3.20-3.22 (so would not take effect if merely CE-filed out-of-hours).

(v) (28 November 2019) in Re Allstar Leisure (Group) Ltd [2019] EWHC 3231 (Ch) HHJ David Cook held filing a NOA on CE-filed by QFCHs outside court hours was not permitted by the rules, but in the circumstances of this case he waived the defect and held the NOA to be valid. The Judge also criticised the deficiencies arising from the confusing statutory scheme;

(vi) (5 February 2020) in Symme & Co Ltd [2020] EWHC 317 (Ch) Zacaroli J considered the earlier decisions and the legislative background. He held that in relation to Notices filed by directors or companies, those filed out-of-hours were defective and that the better approach to cure the defect is to treat those Notices as valid from the next day on which the Court opens for business. In the case of Notices by QFCHs he considered that the rules did permit these to be valid and effective when CE-filed out-of-hours.

 

The New Regime

Happily, what TIPD has done in a few sentences in Para 3, is resolve a number of the conflicting points arising in the above string of cases. We now have some welcome clarity on the following matters:

All of the Notices referred to Para 3.2 shall be treated as delivered to the court at the date and time recorded in the CE-Filing Submission Email, subject to the following exceptions:

(i) (TIPD Para 3.3): a NOI under Sch.B1 para 27 by directors or companies CE-filed out-of-hours (10am-4pm on days the Court is open for business) shall be treated (for the purpose of IR r.1.46(2)) as delivered to the Court at 10am on the next day that the Court is open for business. The 10-day period under Sch. B1 28(2) therefore begins on the date on which the Court is next open for business;

(ii) (TIPD Para 3.4) a NOA under Sch.B1 para 29 by directors or companies CE-filed out-of-hours shall similarly be treated (for the purpose of IR r.1.46(2)) as delivered to the Court at 10am on the next day that the Court is open for business.

 

(TIPD Para 3.5) The Court will continue to review the Notices referred to in TIPD Para 3.2 as and when practicable, in accordance with paragraph 5.3 of PD510. The validity and time at which the appointment of an administrator is effective shall not be affected by reason only of any delay in acceptance of the Notice by the Court;

 

(TIPD Para 3.6) In relation to NOAs filed by QFCHs under Sch.B1 para 14, these may not be simply CE-Filed outside court hours. In order for an out-of-hours NOA by a QFCH to be valid and take effect the procedure for filing by way of fax or email set out in IR 3.20 to 3.22 must be followed (which includes physically delivering documents to the Court on the next occasion it is open for business).

 

The effect of the above is that an NOA or NOI by a company or its directors that is CE-Filed out-of-hours is not invalid, rather it will be treated as taking effect from the next day on which the Court is open for business. Whereas in the case of NOAs filed by QFCHs, the procedure in IR 3.20 to 3.22 still applies (rather than Electronic Working) and it is those rules that must be followed in order to give effect to an out-of-hours appointment by a QFCH.

 

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