Cross Transport Ltd (In Administration), Re

Paragraph 64A of Schedule B1 to the Insolvency Act 1986 gives moratorium creditors super-priority, but it does not require the company’s existing assets to be ring-fenced until those debts are paid. The administrator may incur proper administration expenses, contractual liabilities and remuneration before payment, where doing so is a proper exercise of the administrator’s functions and is directed towards achieving the purpose of the administration. The same approach applies to litigation funding and to decisions about realising property. The administrator must, however, take the super-priority obligation into account and decide on the facts whether expenditure or realisation is justified. The court may give directions on the legal construction of paragraph 64A, but the ultimate commercial decision remains that of the administrator.

The joint administrators of Cross Transport Ltd sought directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986. The company had entered a moratorium and subsequently administration within the statutory period. It owed substantial moratorium and priority pre-moratorium debts, while its remaining assets included potential litigation claims requiring external funding.

The administrators asked whether litigation costs and funding payments could be paid from recoveries before the protected moratorium creditors. The application was advanced principally as a question of statutory construction, rather than as a detailed assessment of the proposed litigation or funding terms. The central issue was the interaction between paragraph 64A and the administrator’s powers, duties and expenses.

1. Construction of paragraph 64A. Paragraph 64A imposes a mandatory duty to pay moratorium debts and priority pre-moratorium debts and gives those creditors super-priority. That priority does not amount to an absolute entitlement to pre-payment from all company assets.
2. The provision does not expressly ring-fence assets existing when the administration begins. Such a construction would be absurd because it could prevent administrators from realising assets, pursuing litigation or otherwise progressing the administration. It would risk failure of the administration and would require office-holders to work without remuneration or funding.
3. The payment obligation must therefore be understood in the context of the statutory purposes of administration and the administrator’s functions, powers and duties. Proper administration expenses, accruing contractual liabilities and remuneration may normally be paid when the administrator considers that course necessary or proper to achieve those purposes.
4. The same approach applies to paragraph 64A’s requirement to realise property necessary to make payment. The administrator must decide whether and when to realise property, taking account both of the administration’s purpose and the super-priority obligation. Expenditure may properly be avoided where the administrator considers that the risk of a negative return makes it inappropriate in the interests of the protected creditors.
5. The administrators therefore had power to enter funding agreements requiring payment to funders before the protected moratorium creditors, if that course accorded with the purpose of the administration and their functions and duties. On the general facts presented, funding the litigation could increase the assets available to those creditors and was not inconsistent with paragraph 64A.
6. The court did not decide whether the administrators should enter the particular agreements. That remained a decision for them on the facts and circumstances. The alternative equitable and inherent-jurisdiction arguments were not determined.

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