Freakley & Ors v. Centre Reinsurance International Company & Ors

The administrators of T & N sought a direction whether insurers' claims-handling expenses incurred after the appointment of administrators were payable with statutory priority under section 19(5) of the Insolvency Act 1986. The House of Lords held that such expenses do not obtain the super-priority conferred by section 19(5) unless they are debts or liabilities incurred under contracts entered into by the administrator in carrying out his functions. Where the insurers acted under a pre‑appointment policy that authorised them to incur and handle claims on behalf of the company, those liabilities were not contracts entered into by the administrator and therefore did not attract the statutory priority.

The court emphasised the statutory purpose of administration as a limited moratorium and that section 19(4) and (5) confers priority only on expenditures and liabilities arising from contracts entered into or adopted by the administrator. The court accepted that, in a particular case, the court could authorise the administrator to ratify or adopt insurers' claims-handling expenditure so as to confer priority, but that would be unusual and require specific evidence; a blanket order was inappropriate.

Background and parties:

• T & N faced large asbestos liabilities and went into administration on 1 October 2001. The administrators sought directions on a number of questions. One remaining contentious question concerned whether insurers who, under a pre-existing insurance policy, handled claims and incurred costs after the administration were entitled to reimbursement with statutory priority.
• The insurers had a policy indemnifying the company for its "ultimate net loss" above a retained limit, and the policy gave insurers exclusive rights to handle and defend claims after certain events. It was common ground that insurers acted as agents for the company and could claim reimbursement.

Nature of the application and issues:

• The administrators applied for directions whether the insurers' right to reimbursement of claims-handling expenses incurred after appointment had priority under the Insolvency Act 1986, in particular section 19(4) and (5), over the administrator's expenses, a floating charge and unsecured creditors.
• The central legal issues were (i) whether such liabilities were "debts or liabilities incurred... under contracts entered into" by the administrator in the carrying out of his functions so as to attract the priority in section 19(5), and (ii) whether the court could, in exercise of its supervisory powers, direct the administrator to authorise or ratify such expenditure so as to create priority.

Procedural history:

• Blackburne J answered the questions at first instance and rejected the insurers' claim to priority ([2004] 2 All ER (Comm) 28). The Court of Appeal reversed on that point ([2005] 2 All ER (Comm) 65). The administrators appealed to the House of Lords.

Court's reasoning and conclusion:

• The House of Lords restored Blackburne J. The court reasoned that the statutory super-priority in section 19(5) is limited to liabilities under contracts entered into by the administrator while carrying out his functions. The insurers' costs were incurred under a pre‑appointment policy which authorised them to act for the company; they were not contracts made by the administrator.
• The court noted the commercial rationale for the insurers' position but considered that it did not align with the limited purpose of administration under the 1986 Act, which was not to alter substantive priorities more than necessary. Although the court had power to authorise or direct the administrator to adopt or ratify such expenditure (thereby creating priority), it would be unusual to do so without focused evidence and where the administrator opposed it. Blackburne J was right to refuse a blanket order.

Auxiliary points:

• The judgment referred to earlier authorities establishing that insurers acting under the policy act as agents and may claim reimbursement (for example Groom v Crocker and Cox v Bankside Members' Agency Ltd) and discussed the role and limits of the administrator's powers (including section 14(6) and the supervisory jurisdiction of the court as illustrated in In re Atlantic Computer Systems plc).

Appeal allowed. The House of Lords restored the decision of Blackburne J that the insurers' claims-handling expenses incurred under a pre‑appointment policy were not debts or liabilities "incurred... under contracts entered into by the administrator" and therefore did not attract the super-priority under section 19(5) of the Insolvency Act 1986. The court indicated that the court could, in a particular case and with appropriate evidence, authorise the administrator to adopt or ratify such expenditure so as to confer priority, but a general or blanket authorisation was inappropriate.

First instance: judgment of Blackburne J ([2004] 2 All ER (Comm) 28) — insurers' claim to priority rejected. Court of Appeal reversed on the remaining question ([2005] 2 All ER (Comm) 65). House of Lords allowed the appeal and restored Blackburne J's decision ([2006] UKHL 45).