Vol 3 (2007) - Issue 1

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Administration Expenses: T&N Insurers Denied

In Freakley and others v Centre Reinsurance Company and others [2006] UKHL 45 the House of Lords was required to determine whether an insurer’s right to recover the cost of handling claims should be categorised as an administration expense.
In 2001, T & N was faced with a large number of tort claims arising out of the use of asbestos in its products. The company benefited from an asbestos liability policy with an excess of GBP 690m and an overall limit of GBP 500m. The policy allowed the insurers to elect to have the exclusive right to handle and defend claims upon an ‘insolvency event’, which included a petition to appoint an administrator.
An administration order was made at the company’s petition under the old regime1 for the purpose of approving a company voluntary arrangement or scheme of arrangement with its creditors. The insurers elected to handle the claims and sought to recover the associated
costs as an expense pursuant to section 19(5) of the Insolvency Act 1986 (‘the Act’).
Under the old regime, the material provisions of the Act provided:
‘19…
…
(3) Where at any time a person ceases to be administrator,
the following subsections apply.
…
(5) Any sums payable in respect of debts or liabilities incurred, while he was administrator, under contracts entered into or contracts of employment adopted by him or a predecessor of his in the carrying out of his or the predecessor’s functions shall be charged on and paid out of any such property as is mentioned in subsection (4) in priority to any charge arising under that subsection.’
The administrators accepted that, in handling claims, the insurers were acting as agent of the company and had a right to reimbursement in the ordinary course. The administrators were not, however, prepared to accept that any such expenditure fell within section 19(5) of the Act. The administrators wanted to have conduct of the claims handling themselves and did not believe that, given the imposition of a statutory moratorium, it was necessary to incur substantial costs. The administrators applied for directions on this and a number of additional issues.
At first instance, Blackbourne J refused to categorise the claims handling costs as an expense on the short ground that the costs had not been incurred pursuant to or in discharge of a contract entered into by the administrators. Although the policy of insurance had been made on behalf of the company, it pre-dated the administration and could not be said to have been made by the office-holders.