Daniel Conway & Ors v Matthew Plass & Ors

Liabilities arising from pre-insolvency contracts become administration expenses under the Lundy Granite principle only where the office-holder’s conduct objectively amounts to retaining the contract’s benefit for the insolvency process. Mere inaction is insufficient. A positive contractual step is also insufficient unless it objectively gives the administration a benefit under the contract. Closing out and terminating foreign-exchange contracts, to crystallise gains or losses, provide certainty or pursue alleged debtor claims, did not confer such a benefit and did not give customer claims super-priority.

Argentex LLP entered special administration. Its joint special administrators sought directions concerning customer forward and over-the-counter derivative contracts which had become unhedged after banking counterparties closed out their corresponding contracts.

The administrators asked whether failing to perform the contracts at maturity, or closing them out and enforcing resulting debts, would incur liabilities as expenses of the special administration. The issue was whether either course engaged the Lundy Granite principle.

1. Direction 1(a): The administrators’ decision not to perform the customer contracts would not incur liabilities as expenses of the special administration. The relevant question is objective and focuses on whether their conduct amounts to an election or choice to continue the contracts. Doing nothing is not such conduct.
2. The Lundy Granite principle can apply to continuing obligations under existing contracts where the office-holder chooses to continue them for the benefit of the insolvency process. Contractual adoption is not necessarily the decisive terminology; the substance of the office-holder’s conduct is critical.
3. Direction 1(b): Closing out the contracts under the contractual provisions was a positive step, but it was not a benefit to the administration estate. Closing out terminated the foreign-exchange contracts and crystallised the relevant gain or loss. There was no material distinction, for this purpose, between closing out and termination.
4. The administrators’ objectives of obtaining certainty and pursuing sums allegedly due from customers did not objectively establish a contractual benefit to the administration. The proposed steps did not extinguish the ITM customers’ status as unsecured creditors or reduce their claims. They therefore did not create super-priority for liabilities arising under those contracts.
5. The answer to both directions was negative. The administrators would not incur administration expenses by doing nothing, and closing out and enforcing resulting debts would not bring the relevant liabilities within the Lundy Granite principle.

First-instance decision. No prior appellate decision is stated in the judgment.