High Court rules that administrators may be able to pay administration expenses and litigation funding ahead of “super priority” moratorium debts

The High Court has held that administrators could enter into litigation funding arrangements that provide for the funder to be repaid from the litigation proceeds ahead of moratorium debts that have “super priority” status, if that accords with the purpose of the administration and their duties: Re Cross Transport Ltd (In Administration) [2026] EWHC 1636 (Ch).

Where an administration follows within 12 weeks of a statutory moratorium process, Paragraph 64A of Schedule B1 to the Insolvency Act 1986 (the “Act”) provides that administrators “must” pay creditors of moratorium debts and priority pre-moratorium debts ("Protected Moratorium Creditors") ahead of other creditors. The present decision confirms that this does not mean Protected Moratorium Creditors must be paid before the costs and expenses of the administration itself, including litigation funding arrangements entered into for the purpose of the administration, in line with the established principle that officeholders cannot be expected to fund litigation personally. 

The decision is particularly significant in instances where litigation represents the main potential source of meaningful recovery in the administration. It will provide comfort to administrators and litigation funders that they will be able to receive payment out of the litigation proceeds, subject to the litigation being properly pursued for the purpose of the administration, which should in turn encourage the pursuit of claims. 

The court found that this outcome was also to the benefit of Protected Moratorium Creditors, as it would potentially increase the realisations available for distribution to them. 

Background 

Cross Transport Ltd (the "Company") entered a moratorium under Part A1 of the Act (a short, "debtor in possession" process, whereby the directors control the company under the supervision of a monitor), during which it incurred debts totalling £643,437.57. Within 12 weeks of the moratorium ending, the Company entered administration, thereby triggering Paragraph 64A of Schedule B1 to the Act.

The principal assets of the administration were modest cash reserves and potential litigation claims, the pursuit of which depended on third-party funding from Pythagoras Capital Limited. The funder indicated it would withdraw funding unless it could be guaranteed repayment from any litigation proceeds ahead of the Protected Moratorium Creditors. 

The administrators were concerned that the strict wording of Paragraph 64A appeared to require those creditors to be paid first, meaning there would be nothing left for the funder, or even for the administrators' own remuneration, if the litigation produced only modest returns. They therefore applied to the court for a direction that the costs and expenses incurred in pursuing the litigation could be paid from the proceeds of the litigation prior to payment of other creditors, including the Protected Moratorium Creditors.

Decision

The High Court (Insolvency and Companies Court Judge Jones) determined that Paragraph 64A does not prevent administrators from paying the costs and expenses of litigation, including a funder's recovery, from the proceeds of that litigation before paying “super priority” Protected Moratorium Creditors, provided the arrangement accords with the purposes of administration, and the administrators' duties.

ICC Judge Jones noted that the starting point for construction is the clear, obligatory wording of Paragraph 64A that Protected Moratorium Creditors “must” be paid first, conferring a “super priority” over the other creditors in an administration. 

He held, however, that “super priority” status is not the same as an absolute right to pre-payment. There is no express wording in Paragraph 64A preventing an administrator from paying the costs of administration before the protected moratorium debts are discharged. 

To imply such a restriction on administrators would, he said, be “absurd”. Administrators would be paralysed from pursuing litigation or taking any steps to increase asset values that inevitably involve incurring and paying costs for as long as the protected moratorium debts remained unpaid. In those circumstances, it was difficult to envisage how the assets would be realised if their value were less than the Protected Moratorium Debt since, as he put it, “No one is going to work for free.”

It must therefore be implied that the obligation under Paragraph 64A to make payment to Protected Moratorium Creditors must be read in the context of the administrators’ ordinary performance of their duties, which include incurring and paying expenses for the purposes of the administration.

ICC Judge Jones considered that his findings were supported by the fact that Paragraph 64A does not impose a set deadline for when payment must be made to Protected Moratorium Creditors. He also drew direct support from authorities on Paragraph 99 of Schedule B1, the provision that protects administrators' remuneration and expenses claims on leaving office. He cited the reasoning of Blackburne J in Re Salmet International Ltd [2001] BCC 796, who explained that many an administration would be "quite impossible" if expenses could only be discharged after the administrator ceased to act, and Dillon LJ in Re Paramount Airways Ltd (No.3) [1994] BCC 172, who noted that it would be impossible as a practical matter to defer all payments to the end of the administration. ICC Judge Jones considered that the same approach to construction applied equally to Paragraph 64A.

Applying that construction, ICC Judge Jones confirmed that the administrators had the power to enter into a funding agreement which required payment to the funders ahead of the Protected Moratorium Creditors, if that was in accordance with the purpose of the administration, their functions and their duties. As presented in the application, the fact that the litigation would leave the Protected Moratorium Creditors no worse off, and at best would increase the realisations available for distribution to them, meant the administrators' decision accorded with that construction.

He declined to go further, however. Whether to enter the funding agreement, on the specific terms proposed, remained a decision for the administrators. He recognised in his judgment that there may be circumstances where administrators conclude that the risk of a negative return is too high to justify expenditure that will require prior repayment — in which case it may be better to preserve and realise existing assets for the benefit of the Protected Moratorium Creditors rather than pursue speculative litigation. That remains a judgment call for the administrators on the facts.