MK Airlines Ltd v Katz & Anor (Acting As Joint Liquidator of MK Airlines)

An administrator’s remuneration does not necessarily breach statutory expense priorities merely because it is paid from a company bank account. The relevant question is whether the funds were beneficially available to the company and whether premature payment caused a shortfall to administration expense creditors.

Third-party funding may be provided on terms restricting its use, including terms permitting preferential payment of administrators’ remuneration, provided it constitutes a genuinely new injection of funds. Mixing those funds with company funds does not itself establish misfeasance. An appeal court should not permit a party to introduce a new factual case or fresh evidence where that would turn the appeal into a rehearing.

The appellant was a former administrator of MK Airlines Ltd. The company’s liquidators obtained orders below requiring him to repay sums representing administrators’ remuneration, disbursements and pre-administration legal expenses.

The appeal challenged the construction of a third-party deed of indemnity, the finding that the administration was insolvent when transferred to replacement administrators, the existence and causation of any shortfall to administration expense creditors, the appellant’s individual liability, and the refusal of relief under section 1175 of the Companies Act 2006.

The central issues were whether the indemnity funds remained subject to the statutory priority rules and whether the appellant’s appeal could properly be advanced without further evidence.

1. The appeal succeeded in relation to the remuneration sums but failed in relation to the Salans pre-administration expenses. The order below could not stand insofar as it required repayment of the remuneration.

2. Administrators must apply company assets in accordance with rule 2.67(1) of the Insolvency Rules 1986. That restriction applies to assets beneficially belonging to the company. It does not prevent a third party from injecting new funds on terms restricting their use or giving priority to nominated payments.

3. The deed was construed as providing a facility whose first priority was to indemnify the administrators’ remuneration and disbursements. The arrangement was lawful and was not an attempt improperly to contract out of the statutory scheme. The funds were intended for specified purposes and were not at the company’s free disposal.

4. Payment of remuneration from company accounts did not automatically establish misfeasance. Misfeasance required proof that premature payment of remuneration from company funds caused a shortfall to administration expense creditors. Because the third-party facility was dedicated to paying the remuneration, payment from mixed accounts did not cause such a shortfall.

5. The challenge to the insolvency finding failed. An appellate court may interfere with factual findings only where the decision cannot reasonably be explained or justified, or where there is an identifiable material error. Mere disagreement with the lower court’s evaluation was insufficient.

6. The proposed new arguments concerning shortfall, individual liability and fresh evidence were not suitable for determination on appeal. They could have been raised below and required further evidence, which would have converted the appeal into a rehearing.

7. The court considered, for completeness, that joint administrators authorised to act individually may ordinarily require proof of individual or joint wrongdoing. However, where the alleged misfeasance consists of breach of statutory payment priorities, all administrators might be jointly and severally liable for resulting loss if proper performance by each would have prevented the breach.

8. The section 1175 argument failed because relief had not been sought below. The Registrar had nevertheless exercised a materially similar discretion when deciding the order under Schedule B1 paragraph 75(4) of the Insolvency Act 1986.

The appeal was from orders made by Registrar Derrett under Schedule B1 paragraph 75(4) of the Insolvency Act 1986. Permission to appeal was granted by Nugee J on 29 October 2016. The High Court allowed the appeal concerning remuneration and dismissed it concerning the Salans sums.