High Court clarifies moratorium debt priority in administrations

The High Court has ruled that administrators may pay litigation funders and other administration costs ahead of debts carrying statutory super-priority following a Part A1 moratorium, rejecting an interpretation of the Insolvency Act 1986 that would prevent administrators from funding the work needed to generate recoveries. ICC Judge Jones held that paragraph 64A of Schedule B1 gives moratorium debts and priority pre-moratorium debts super-priority over other creditors, but does not require those liabilities to be paid before administrators can incur and discharge expenses necessary to fulfil the purpose of the administration.

The situation arose in the insolvency proceedings of Cross Transport, which entered a Court-approved moratorium in March 2023 and incurred protected moratorium debts of approximately £643,438. It entered administration in June 2023, within the 12-week period during which paragraph 64A applies. Its remaining assets comprised approximately £110,000 in cash and potential litigation claims, including proceedings seeking about £156,000 and possible claims concerning loans exceeding £1 million.

HM Revenue & Customs was both a protected moratorium creditor and the administration’s sole preferential creditor, with a potential preferential claim of approximately £725,782. No return was expected for ordinary unsecured creditors.

Administrators Richard Hunt and David Kemp of Exigen Group said the litigation could not proceed without third-party funding. The existing and proposed funder, Pythagoras Capital, was unwilling to provide funding unless it could recover its advances from successful litigation proceeds before distributions were made under paragraph 64A.

Paragraph 64A provides that an administrator “must” make a distribution in respect of protected moratorium debts and requires those debts to be paid ahead of floating charge claims and the statutory charges arising when an administrator leaves office. The administrators sought directions confirming that litigation costs, including legal fees and funder payments, could nevertheless be paid from recoveries before the protected debts.

ICC Judge Jones said treating the paragraph 64A priority as an absolute requirement for pre-payment would produce an absurd result by paralysing administrations where existing assets were insufficient to pay the protected debts. Administrators could be prevented from pursuing claims, negotiating recoveries or taking other steps capable of increasing asset values, even though those steps could ultimately improve the protected creditors’ return.

“Super-priority does not equate to absolute entitlement to pre-payment,” the judge said. Paragraph 64A contains no express requirement that assets existing at the start of the administration be ring-fenced for protected creditors, and Parliament had not stated that administration expenses, contractual liabilities and remuneration could not be paid first.

Administrators must instead exercise their powers pragmatically while taking the protected debts’ elevated status into account. They may pay expenses, liabilities and remuneration where doing so properly advances the administration’s purpose, but must assess whether the proposed expenditure creates an unjustifiable risk to the protected creditors.

Applying that construction, the Court held that the administrators had power to enter litigation funding agreements requiring the funder to be paid ahead of protected moratorium creditors. On the application as presented, the proposed funding could not worsen the creditors’ position and could increase the funds available for distribution.

The Court stopped short of approving any particular funding agreement or litigation strategy. Whether the administrators should pursue the claims, and on what terms, remained a matter for their commercial judgment and statutory duties.

Ultimately, the ruling confirms that paragraph 64A protects qualifying moratorium creditors without depriving administrators of the ability to finance asset realisations that may be necessary to pay them.

Read the decision here.

Matthew Moriarty of (instructed by Circle Law) acted for the administrators, Richard Hunt and David Kemp of Exigen Group.