Freakley and others (Apellants) v. Centre Reinsurance International Company and others (Respondents) and one other action

A liability qualifies for priority under section 19(5) of the Insolvency Act 1986 only if the administrator incurred it under a contract entered into while carrying out the administrator’s functions. A contract made for the company by an agent exercising authority conferred before the administration is not treated as a contract entered into by the administrator.

The court may direct an administrator to authorise or ratify particular expenditure, thereby giving the resulting reimbursement liability statutory priority. Such approval requires evidence about the specific expenditure. It will be unusual where the administrator considers the expenditure unnecessary for the limited purposes of the administration.

T & N Ltd entered administration after facing numerous asbestos-related tort claims. Its insurance policy gave the insurers exclusive claims-handling rights following an insolvency event and entitled them to reimbursement of claims-handling expenses.

Blackburne J held that expenses incurred through the insurers’ exercise of pre-administration contractual authority did not receive priority under section 19(5) of the Insolvency Act 1986: [2004] 2 All ER (Comm) 28. The Court of Appeal reversed that decision: [2005] EWCA Civ 115; [2005] 2 All ER (Comm) 65.

The issue was whether the insurers’ contractual right to reimbursement for post-appointment claims-handling expenditure ranked ahead of other administration costs, the floating charge and unsecured creditors.

1. The appeal was allowed unanimously. Lord Hoffmann delivered the leading speech. Lord Hope, Lord Phillips, Lord Walker and Lord Brown agreed with his reasons. Blackburne J’s determination of the priority issue was restored.

2. Per Lord Hoffmann, section 19(4) of the Insolvency Act 1986 covers the administrator’s remuneration and expenses. Section 19(5) gives superior priority to third-party debts and liabilities incurred under contracts entered into by the administrator while carrying out the administrator’s functions.

3. The insurers’ expenditure did not fall within section 19(5). Neither the claims-handling contracts nor the policy conferring authority upon the insurers had been entered into by the administrators. Although the insurers contracted as agents for the company, their authority derived from the pre-administration policy and not from the administrators.

4. The fact that an administrator alone may act or confer new authority for a company in administration does not mean that every person already authorised to act for the company derives that authority from the administrator. A company may previously have conferred authority which the administrator cannot revoke in law or practice. Contracts made under such authority are made for the company, but not for the administrator.

5. This construction accorded with the statutory purpose. Administration under the 1986 Act imposed a moratorium and substituted court-appointed management while rescue, arrangement or advantageous realisation was explored. It did not generally alter contractual rights or insolvency priorities. Sections 19(4) and 19(5) entrusted the administrator, subject to the court’s supervision, with deciding which expenditure was necessary and should receive priority.

6. The court’s supervisory jurisdiction could be used to direct the administrator to authorise or ratify identified claims-handling expenditure. The resulting reimbursement liability would then receive section 19(5) priority. Such an order would require evidence about the particular expenditure and would be unusual where it contradicted the administrator’s business judgment. The insurers were therefore not entitled to a blanket priority for expenditure undertaken pursuant to their own contractual rights and principally protecting their own commercial interests.

1. House of Lords: The appeal was allowed unanimously and Blackburne J’s decision on the priority issue was restored: [2006] UKHL 45.
2. Court of Appeal: The court reversed Blackburne J on the remaining disputed question and treated the claims-handling liabilities as incurred by the administrators in carrying out their functions: [2005] EWCA Civ 115; [2005] 2 All ER (Comm) 65.
3. High Court: Blackburne J refused to accord automatic administration-expense priority to liabilities incurred through the insurers’ exercise of authority conferred by the pre-administration policy: [2004] 2 All ER (Comm) 28.