Judgment on BAILII at: http://www.bailii.org/ew/cases/EWHC/Ch/2018/540.html
MK Airlines Ltd (“MKA”) entered into administration in June 2008. The Appellant was one of three individuals appointed as administrators (“the Administrators”).
A prospective purchaser was found, Transatlantic Aviation Ltd (“TAA“), which wished to maintain MKA as a going concern so as to acquire its Civil Aviation Authority certificates. TAA agreed to fund the administration and the continuation of MKA as a going concern. Millions of dollars were paid by TAA into MKA’s bank account in accordance with that agreement. Of that money, £853,000 was drawn by the Administrators to pay their remuneration and disbursements.
MKA later went into liquidation and the Respondents were appointed as liquidators. They brought a claim against the Appellant on the basis that the Administrators had used MKA funds to pay their own remuneration in a manner that was inconsistent with the statutory priority rules (the claim was brought against the Appellant only due to a previous settlement with the other Administrators).
First instance decision
At first instance, Registrar (now ICC Judge) Derrett held that once TAA paid money to MKA, that money was an asset of MKA and therefore had to be distributed in accordance with the statutory scheme. In this instance, £853,000 was not used to pay the expenses of the administration but to pay the Administrators’ remuneration. That was inconsistent with the statutory scheme. Such (mis)use of MKA funds amounted to a breach of duty for which the Appellant was liable.
The Appellant appealed.
The decision on appeal
Sarah Worthington QC (sitting as a deputy High Court Judge) held as follows.
It is, of course, the case that administrators must apply a company’s assets in accordance with the statutory priority rules (which require expense creditors to be paid before the administrators’ remuneration). However, that only applies to company assets. It does not prevent third parties from providing new money to be used for specific purposes (provided that does not worsen the position of any existing creditor): at  – .
The terms on which TAA provided the money to MKA were that the Administrators would be paid first out of the fund (i.e. before expenses creditors): at .
The money was paid by TAA to MKA in order to pay the Administrators’ remuneration (a perfectly legitimate way of funding an administration as aforesaid). If the money had been paid into a segregated bank account then there could be no allegation of misfeasance in relation to payment of remuneration. Therefore, it follows that one would expect the same result if the money was not paid into a segregated bank account and was mixed with general company funds: at .
In short, MKA (or, strictly speaking, the expense creditors) suffered no loss (alternatively, there was no breach of duty).