Determining the priority of payments in an insolvency (Oldham v Katz (acting as joint liquidator of MK Airlines))

Tina Kyriakides, barrister (and counsel for the appellant) at Radcliffe Chambers highlights the importance of separate funding arrangements when there are no funds to pay administrators’ remuneration.

Re MK Airlines Ltd (in liquidation); Oldham v Katz (acting as joint liquidator of MK Airlines) and another [2018] EWHC 540 (Ch) [2018] All ER (D) 126 (Mar)

What are the practical implications of this case?

This case was concerned with the situation where a company in administration, MK Airlines Limited (MKA) had no funds—and was highly unlikely to have funds in the future—to pay administration expenses, including administrators’ remuneration. Although this case was decided on its facts, it highlights the importance of carefully drafting any agreement for funding the payment of administration expenses and, in particular, administrators’ remuneration, so as to ensure that the monies advanced for these purposes never become company monies, thereby avoiding the consequent risk of an administrator acting in breach of the priority rules under rule 2.67(1) of the Insolvency Rules 1986, SI 1986/1925 (IR 1986).

Further, it highlights how, in such circumstances, it is advisable to use a separate account solely for the purpose of receiving such funds and making payments from them.

What was the background?

MKA went into administration in 2008. Michael Oldham was one of the administrators. MKA, the administrators and a funder entered into a deed of indemnity (the deed), under which the funder agreed to pay MKA’s administration expenses if MKA did not have sufficient funds to do so, with the administrators’ remuneration being paid in priority to the other expenses. The monies drawn down under the deed were paid into MKA’s bank account. Subsequently, MKA went into liquidation and the liquidators brought misfeasance proceedings against Mr Oldham.

Their principal claim was that Mr Oldham had acted in breach of his duties by paying administrators’ remuneration in priority to other administration expenses, some of whose claims had still not been paid and that this conduct amounted to a breach of IR 1986, SI 1986/1925, r 2.67(1). The liquidators won at first instance. The registrar accepted the liquidators’ case that at the time that Mr Oldham left office, MKA was insolvent. She also accepted the liquidators’ argument that, as a matter of construction of the deed, the monies drawn down belonged to MKA and that, even if that were wrong, the effect of paying monies drawn down under the deed into MKA’s bank accounts was to make them MKA’s monies, with the result that the priority rules under IR 1986, SI 1986/1925, r 2.67(1) applied. The court on appeal overturned the registrar’s decision both on construction and also on the effect of paying the monies into MKA’s bank account.

What did the court decide?

The court on appeal held that as a matter of construction of the deed, monies drawn down under it by the administrators for remuneration belonged to them and not MKA. The judge looked at the factual context in which the deed had been entered into and construed the provisions of the deed against that background. In particular, the court took into account the following:

  • the fact that MKA had made substantial trading losses but wanted to trade again
  • the evident risk to the administrators in such circumstances of not receiving anything for their remuneration from MKA’s trading receipts
  • the fact that the deed had been drafted by lawyers and signed by experienced insolvency practitioners and an experienced corporate investor

The court also held that by paying the funds drawn down under the deed into MKA’s bank accounts and then using them to pay, inter alia, the administrators’ remuneration, no misfeasance had been committed by Mr Oldham since, under the deed, MKA was not free to use the monies as it pleased, but was obliged to apply the monies in accordance with the specific purposes provided for by the deed. The judge held that the receipt of the funds under the deed and the payments made in accordance with its provisions had no net effect on the creditors of MKA.

Further reading

If you are a LexisPSL subscriber, click the links below for further information on order of payments in administration:

Office holder remuneration (Subscriber access only)

Waterfall of payments in administration—the position under the Insolvency (England and Wales) Rules 2016 (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

Interviewed by Stephanie Boyer

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor

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