Freakley v Centre Reinsurance International Company & Ors  UKHL 45
This case concerns whether a claim to reimbursement of claims-handling expenses should have priority over other creditors on insolvency of the insured.
The House of Lords in Freakley v Centre Reinsurance has recently had to consider whether insurers who had incurred expenses on behalf of a company after it went into administration (those expenses arising as a result of a contract made pre-administration) could claim that those expenses should be repaid before the claims of other creditors.
The company in question was T&N who, in 2001, faced a large number of tort claims arising out of the use of asbestos in its products and found itself unable to pay its debts. As a result, administrators were appointed on 1 October 2001.
T&N had the benefit of an insurance policy under which it was entitled to be indemnified against its “ultimate net loss” (which included liabilities under asbestos claims and the costs of defending these claims) in excess of a certain limit if a petition for administration were presented.
If this limit was reached, the insurers had the exclusive right to handle and defend such claims.
Under the Insolvency Act 1986, an administrator is entitled to be remunerated by the company for any personal expenses that they incur whilst performing their duties. In addition, if the administrator incurs debts or liabilities on behalf of the company during the administration, these are to have priority when it comes to repayment.
The claims of the insurers
The insurers in this case claimed that the expenses they had incurred whilst handling the claims should be repaid before other creditors of T&N. The insurers argued that, as a company in administration could act only through its administrator, any liabilities incurred on behalf of a company in administration must have been incurred on behalf of the administrator and therefore should be payable as an expense of the administration in priority to other claims.
The decision of the House of Lords
The House of Lords held that the expenses incurred by the insurers could not be said to be an expense of the administration and therefore would not have priority when it came to repayment.
Lord Hoffman made two main points.
First, while it was true that once an administrator had been appointed only they could confer authority to act on behalf of the company, the administrator had had nothing to do with the contracts under which the insurers had been given authority to incur expenses. These had been entered into before the administrator had been appointed and, although they were made on behalf of the company, had not been specifically approved by the administrator.
Secondly, whilst the insurers wanted to handle the claims themselves in order to be able to use the right of set-off, they also wanted to secure payment of their expenses as a priority claim, rather than having to wait and attempt to set them off against sums payable by the insurers for losses that might be incurred by T&N above the limit. Lord Hoffman called these “sensible business objectives” but stated that “they have little to do with the purposes of administration”.
As a result, the appeal by the insurers on this issue was dismissed.
New regime after 15 September 2003
This decision is obviously an unwelcome outcome for the insurers. But the decision is not surprising. This case relates to an administration conducted under the old regime applicable to administrations before the Enterprise Act 2002 came into force. It should not be treated as a precedent for new administrations (on or after 15 September 2003), where a new administration expense regime applies.