Cross Transport Ltd (in administration)

On 23 March 2023 Cross Transport Ltd went into a moratorium under s A3 Insolvency Act 1986. It incurred protected moratorium debts totalling £643,437. On 5 June 2023 it went into administration following a notice of intention to appoint administrators given by Pulse Cashflow Finance Limited, a qualifying floating charge holder. Pulse got paid in full, leaving assets in the form of cash in the region of £110,000 and litigation claims, proceedings having been issued in 2024 claiming £156,000 seeking relief under ss 212, 238 and 239 Insolvency Act. Further proceedings were being investigated relating to the repayment of loans of some £1 million. HMRC was a protected moratorium creditor as well as the sole preferential creditor in the administration with a claim in the region of £725,782. No return was expected for the unsecured creditors. In those circumstances the administration was being run principally for the benefit of HMRC. It was only the existing and prospective proceedings which, if successful, would provide a return to the moratorium creditors.

The existing proceedings were being funded by litigation funders, Pythagoras Capital Limited, who were also prospective funders of the proposed loan claim. Pythagoras had, however, indicated to the administrators that it would withdraw funding for the existing proceedings and decline to fund the prospective loan claim in the absence of a guarantee that it would be able to recover under its funding agreements, if the litigation was successful, by reason of the priority given to the claims of protected moratorium creditors under par 64A of Sch B1 Insolvency Act (which provides that the administrator must make a distribution to the creditors of the company in respect of moratorium debts and priority pre-moratorium debts (within the meaning of 174A Insolvency Act). The mandatory wording of the provision could have the effect of leaving nothing for the funders or, for that matter, to cover the payment of any other expenses or contractual liabilities of the administration, including the administrators’ remuneration. Without funding the litigation would not be pursued.

The administrators had proposed an accommodation with the moratorium creditors but they had not responded save for HMRC who had rejected their proposals. The administrators issued an application pursuant to Sch B1 para 63 seeking a direction that the costs and expenses incurred in pursuing the litigation could be paid out of the fruits of any recovery in the litigation prior to payment of any other creditors, including the protected moratorium creditors.

Counsel for the administrators submitted:

• The protected moratorium creditors, and HMRC as a preferential creditor, had nothing to lose and all to gain if the relief sought was granted. If the litigation was successful, there should be more net realisations to distribute. If unsuccessful, the funder would bear the costs.
• It was wrong in principle for an administrator to have to carry out his or her duties without remuneration.
• The payments in issue should be permitted because they fulfilled the requirements of Sch B1 para13, being necessary and incidental to the administrators’ functions. Para 64A did not impinge upon the carrying out of those functions except to the extent that the administrators had a further duty to consider, namely the payment of the protected moratorium creditors at such stage and in such amount that might prove to be appropriate.
• Alternatively, he relied on what he described as an equitable principle that an office-holder could permit recoveries from litigation to be paid first to defray the costs of that litigation, which should apply in this case (see Katz v McNally [1997] BCC 784, [1997] 2 BCLC 579).
• In the further alternative, the court should exercise its inherent jurisdiction to permit office-holders to depart from legislative requirements when it is convenient, economical and sensible to do so for the purposes of the relevant insolvency regime (see Re Advent Computer Training Ltd [2010 EWHC 1042 (Ch), [2011] BCC 52).

Following a thorough analysis of the relevant statutory provisions and the case law ICC Judge Jones made a direction as sought. His reasons are lengthy and complex in parts, but may be summarised as follows:

• The starting point for construction was the clear wording of para 64A which conferred “super priority” status on protected moratorium creditors over other creditors in an administration. Super priority did not, however, equate to an absolute entitlement to pre-payment. Para 64A did not make express provision for the payment of administration costs, contractual liabilities or remuneration in fulfilment of the purpose of the administration. It would be “absurd” to imply such a literal construction because it would paralyse the administration until the protected moratorium debts were paid, opening up the prospect of failure of the administration. It was to be implied, therefore, that the obligation to make payment to the protected moratorium creditors was to be seen in the context of fulfilling the purposes of the administration by the administrators’ performance of their duties and functions in accordance with the purpose of the administration.
• That was consistent with a statutory scheme for moratoriums that did not itself provide security for protected moratorium debts but only for termination for non-payment, leaving open recovery in the process of any administration, should one follow within the 12-week moratorium period.
• Performance by the administrators of their duties and functions normally included the payment of expenses, contractual liabilities and remuneration insofar as the administrators decided that such payments were a proper exercise of their functions and powers to achieve the purpose of the administration, although, the existence of para 64A meant, in reaching such decisions ,they would need to take into consideration the obligation to fulfil the “must” duty to pay the protected moratorium debts as a super priority liability.
• Therefore, para 64A preserved the administrator’s ability to manage the company pragmatically while respecting the elevated status of protected moratorium debts. The administrator must adopt the same approach when applying the express duty in para 64A to realise any property necessary to fulfil the payment duty. That also required a decision whether and when to realise property.
• Normally payment of administration expenses, contractual liabilities and remuneration would be for the ultimate benefit of the administration and, in consequence, would be anticipated to achieve a larger return for creditors. That being so, it would normally benefit the protected moratorium creditors because of their super priority. However, there may be circumstances in which the administrator might decide otherwise, for example, if the administrators decided that the risk of not achieving a positive return was too high from the perspective of the interests of the protected moratorium creditors to justify expenditure which would require prior repayment. They might consider it right to preserve and realise the current value of assets for the purpose of fulfilling the obligation to pay the protected moratorium debts in super priority. That would depend on the facts and circumstances and would be a decision for the administrators.
• Insofar as the protected moratorium creditors were not paid and the cessation of appointment provisions of para 99 applied and/or there was any security to which para 70 applied, the payment that “must” be made to the protected moratorium creditors under para 64A would have priority over the statutory charges.
• There was no wording in para 64A setting any date, time or circumstance when the payment “must” be made, which implied that the duty to pay had only to be performed to the extent that payment could be made and only when the administrators considered it right to make it, taking into consideration the purpose of the administration and their functions, powers and duties, including the duty imposed by para 64A.
• That construction was consistent with the approach taken to the construction of para 99 by Blackburne J in Re Salmet International Ltd, Spring Valley Properties v Harris [2001] BCC 796, which applied equally to para 64A:

“Many an administration would be quite impossible if expenses could only be discharged out of the company’s property at the time that the administrator ceases to act. In my view, its purpose is to make clear that when the administrator leaves office he will be entitled to deduct his (undrawn) remuneration and pay any expenses properly incurred by him (but not hitherto provided for) out of any property of the company in his custody or under his control in priority to the floating charge holder’s rights. It is necessary so to provide because a person may cease to be an administrator before his remuneration has been drawn and any expenses properly incurred by him have been paid”

(cf Re Paramount Airways Ltd, Powdrill v Watson [1994] BCC 172 and other authority).

From all those, and other matters, the judge concluded:

“[I]t is clear the administrators have power to enter a funding agreement(s) for the Litigation which will require payment to the funders ahead of the Protected Moratorium Creditors should that accord with the purpose of the administration, their functions and their duties. As presented in general terms within their application, the fact that the result can at worst not adversely affect the duty to pay the Protected Moratorium Creditors and at best will increase the realisations available for distribution to them means their decision accords with that construction.”

He also said, however, that how the administrators should proceed on the facts and in the circumstances applying what he had held to be the proper approach to the construction of para 64A remained a matter for them.

This would appear to be the first judgment dealing with the tension between the obligation to pay moratorium debts and the needs of an administration following a moratorium. It was given against the background of an unusual set of facts; but the judgment proceeds on the basis that it deals with the application and the issues arising from it on a general rather than a fact-specific basis. In para 11(ii) of his judgment the judge says, “I am asked to decide the application more on the basis of principle than practice in the sense that the application could effectively concern any litigation for any quantum, with any amount of costs/expenses, with any form of merit and irrespective of the potential for recovery,” so must be assumed to have done just that. It is important, however, to note that HMRC, although given notice, decided not to appear on the application, so the authority of the case is necessarily weakened by reason of its not having been fully argued. How the issue raised may develop in future remains, therefore, to be seen; and in the meantime, administrators may well be advised to rely on it with caution, if necessary seeking their own directions in the light of the circumstances of the administration in respect of which they have been appointed.

Readers may recall that the House of Lords itself once decided that “shall” was not always mandatory, while Lord Steyn (in R (on the application of Westminster City Council) v National Asylum Support Service [2002] UKHL 38) warned that “the context must always be identified and considered before the process of construction or during it,” which appears to be what ICC Judge Jones has done in the case before him.

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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