In the long running saga of Turner & Newall's administration, the House of Lords has recently ruled in Freakley -vs- Centre Re. It has been held conclusively that the claims handling costs incurred by reinsurers on behalf of the company after the appointment of administrators should not be given statutory priority over the company's other debts.

In 2001, Turner & Newall appeared unable to pay its debts due to a large number of tort claims arising out of the use of asbestos in its products. Administrators were appointed. The company had the benefit of an asbestos liability policy under which it was entitled to be indemnified against its ultimate net loss (including liabilities and claims handling costs) up to £500 million over a retained limit of £690 million. It was a condition of the policy that after the occurrence of an insolvency event or the reaching of the retained limit, reinsurers should have the exclusive right to handle and defend claims.

In 2004, the Commercial Court resolved various issues: reinsurers were entitled both to handle the claims and to reimbursement of expenses for handling claims up to the retained limit. However, any reimbursement was not an expense of the administration and therefore should not be given any priority.

Reinsurers argued successfully in the Court of Appeal that the claims handling expenses amounted to liabilities incurred by the administrator in carrying out his functions under s19(5) Insolvency Act 1986, which granted them priority over other costs of the administration, any floating charges or unsecured creditors. The argument ran that as a company in administration it can only act by its administrator, liabilities incurred on behalf of the company in administration must have been incurred on behalf of the administrator. This was firmly rejected in the House of Lords on the basis that the administrator had nothing to do with either the contracts under which the liabilities were incurred or the contract which gave the reinsurers authority to incur them on behalf of the company.

Reinsurers understandably wanted to handle the claims to ensure that the ultimate net loss would not exceed the retained limit or would do so by as little as possible. However, they could not at the same time bring themselves within s19(5) Insolvency Act 1986. Consequently, their only means of reimbursement would be by way of set off, if the retained limit was exceeded. The purpose of administration under the Insolvency Act 1986 was to create a moratorium on the enforcement of debts to see if some form of rescue or arrangement was available. There was no policy reason why insurers' obligations should be given priority. Reinsurers could not both manage the claims to maximise their advantage and recover the cost from administrators. Whilst these were “sensible business objectives”, in the absence of administrators' agreement the cost burden could not be transferred in this way.

This Viewpoint item appeared in issue 111 of JTW News - December - January 2006

Author: Julian Miller - Beachcroft LLP