Agreements with administrators often contain provisions to the effect that any claim against the company in administration will rank only as an unsecured claim and not as an expense of the administration. Although such provisions are common, there has always been some doubt as to their efficacy.
In the recent English case of Amble Assets LLP (In Administration) and Anor. v Longbenton Food Limited (In Administration), the court held that such a "priority" clause was enforceable. In this case, Longbenton ("L") had agreed to purchase the business and assets of certain other companies in administration. The parties entered into a sale agreement ("SPA") but L did not have funds to complete the purchase immediately. To give the administrator some security that the deal would complete, L paid the administrators a "non-refundable deposit" of £800,000. The SPA contained a provision that any sums payable under the SPA by the company in administration to L would rank only as an unsecured claim against the company in administration.
The sale did not complete. L argued (for reasons which do not concern us here) that it was entitled to a refund of the deposit. The administrators of the Seller argued that, even if L was entitled to a refund, as a result of the "priority" clause, such repayment would only be an unsecured claim (which would in this case give rise to a nil return - given a lack of funds).
The conceptual objection to this type of clause is that it can be considered to be an attempt to contract out of the statutory order of priorities set out in paragraph 99 of schedule B1 to the Insolvency Act 1986. However, the court held that a clause such as this was not an attempt to contract out of the statutory scheme. Instead, the parties had simply agreed to make specific arrangements for the treatment of particular liabilities. The court could see no reason why it should not give contractual effect to the provision.
No doubt this decision will be welcomed by administrators.
However those parties who are prepared to enter into agreements
with administrators should be wary of the effect of such clauses.
As was the case in Longbenton, accepting such a clause may mean
that although there will be a right of recovery, that right may
well be commercially worthless.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
