Re Cross Transport: Can Administrators Pay Litigation Funders Ahead of Moratorium Debts?

Key Takeaways

1. The High Court has confirmed administrators can pay litigation funders and other administration expenses from the proceeds of claim recoveries ahead of protected moratorium debts if this is necessary to fulfil their duties.
2. Paragraph 64A of the Insolvency Act gives moratorium debts “super priority” among creditors but does not require these debts to be paid before all administration expenses such as litigation funding.
3. If no action is taken, valuable claims may go unfunded, and creditors—including those with moratorium debts—could receive nothing from the administration.
4. Litigation funding is vital in administrations where the company’s main asset is a legal claim, as funders often require assurances on the priority of their repayment.
5. Administrators must ensure that paying litigation costs serves the administration’s purpose and leaves moratorium creditors no worse off, balancing commercial risks and potential returns.
6. Moratorium debts must arise during a Part A1 moratorium in the 12 weeks before administration to benefit from super priority under the recent rules.
7. Our solicitors can advise administrators, directors, and creditors on structuring litigation funding agreements and navigating the priority rules for administration expenses and moratorium debts.
8. If you are an affected creditor, you risk losing the chance for a significant return by not participating in administration or failing to challenge decisions that affect your interests.
9. Creditors can still challenge administrators’ decisions in court if a funding arrangement or expense payment is not made in their best interests.
10. There are strict rules and procedural steps for prioritising debts and expenses in post-moratorium administrations, and timely action is often necessary to protect your position.

Book a free consultation with our expert insolvency lawyers to discuss your situation.

The Commercial Challenge for Administrators and Funders

When a financially distressed company emerges from a Part A1 moratorium and enters administration, the value of the business may rest on a single legal claim. Funders will only support litigation if they are paid from any recovery, but Paragraph 64A says moratorium debts “must” be paid first. Does this block the administrators from paying funders or their own costs from proceeds, and so make pursuing claims impossible?

The High Court’s decision in Re Cross Transport Ltd (In Administration) [2026] EWHC 1636 (Ch) resolves this dilemma. ICC Judge Jones ruled that while moratorium debts have “super priority”, this does not prevent payment of litigation funding and necessary costs—if the arrangement supports the purpose of the administration and the administrator’s duties.

This ruling unlocks value for all stakeholders, enabling viable claims to be pursued and maximising returns, even in administrations with large protected moratorium debts.

The Moratorium and Administration Statutory Schemes

The Part A1 Moratorium

The Part A1 moratorium, introduced by the Corporate Insolvency and Governance Act 2020, is designed as a short “breathing space” for distressed companies. It typically lasts 20 business days but can be extended up to a year with the right consents or court order.

• Directors stay in charge but work with a licensed insolvency practitioner (the Monitor), who oversees viability.
• Creditor action is mostly frozen. Creditors cannot start or continue proceedings, enforce security (with some exceptions), repossess goods, or present winding-up petitions without court permission. Suppliers cannot terminate contracts just because of the moratorium.
• Certain debts must be paid as they fall due. These include the Monitor’s fees, goods and services supplied during the moratorium, rent, wages, redundancy payments, and financial service liabilities.
• If these debts are not paid on time, the Monitor must end the moratorium. There is no ring-fencing or security over assets for unpaid debts. If the moratorium fails and a company goes into administration, the usual rules of administration apply, except where Parliament provides otherwise.

Administration Under Schedule B1 to the Insolvency Act

On entering administration, control of the company passes to administrators. Their statutory purposes are:

1. To rescue the company as a going concern.
2. If this is not achievable, to achieve a better result for creditors as a whole than liquidation.
3. If that is not possible, to realise property for secured or preferential creditors.

A statutory “waterfall” sets out the order in which creditors are paid:

1. Expenses of the administration (but see below for Paragraph 64A).
2. Preferential debts (mainly certain employee claims, some HMRC).
3. Secondary preferential debts.
4. Floating charge holders.
5. Unsecured creditors (but only if Paragraph 65 is satisfied).

The 2020 Act introduced Paragraph 64A (super-priority for moratorium debts) and Paragraph 65 (allowing payment to unsecured creditors only after Paragraph 64A debts are paid), as well as other amendments to facilitate distributions and streamline dissolutions.

What Is Paragraph 64A and Why Does It Create “Super Priority”?

Paragraph 64A of Schedule B1 to the Insolvency Act 1986, inserted by the Corporate Insolvency and Governance Act 2020, applies where a company enters administration within 12 weeks of a moratorium ending.

The administrator must—before paying most other claims—pay in full:

• Moratorium debts (liabilities incurred during or for the purposes of the moratorium).
• Priority pre-moratorium debts (some debts incurred before the moratorium for its purposes).

These creditors are called “Protected Moratorium Creditors” and their claims, “Protected Moratorium Debts”.

Payment of these debts:

• Ranks ahead of floating charges,
• And ahead of the administrators’ own statutory charges on leaving office (Paragraph 99).

This was intended to support the moratorium regime, incentivising landlords, HMRC, suppliers and advisers to support restructuring by offering comfort that these debts would be paid first if a rescue failed.

The Cross Transport Facts: A Moratorium, £643k Debt, and a Litigation-Dependent Administration

The Company and the Moratorium

Cross Transport Ltd went into a Part A1 moratorium by order of the High Court on 23 March 2023. During the moratorium, it accrued Protected Moratorium Debts of £643,437.57.

Entry into Administration

Pulse Cashflow Finance Limited, a floating charge holder, filed an intention to appoint administrators within 12 weeks after the moratorium ended. Administration began, triggering Paragraph 64A.

Assets included:

• £110,000 in cash
• Two potential litigation claims (“the Litigation”):
  • Existing Litigation: proceedings issued 9 February 2024, claiming £156,000 plus interest, against former directors (sections 212, 238, and 239 applications).
  • Loan Litigation: potential further claims for repayment of loans exceeding £1 million.

HMRC was both a Protected Moratorium Creditor and the only preferential creditor, with a claim of about £725,782. The administrators reported the practical effect: the administration primarily benefitted HMRC and moratorium creditors, as no return was expected for unsecured creditors.

The Funding Challenge

The Litigation could only proceed if a funder (Pythagoras Capital Limited) was permitted to recover its advance plus agreed return ahead of the moratorium creditors, out of successful recoveries. If not, the funder would walk away. Without litigation, the only available cash (far less than the debts) would go to moratorium and preferential creditors, and any further recovery would be lost.

The Proposal to Creditors:

• £14,362.71 in administration expenses be recognised as prior,
• £50,000 drawn for their time costs (out of £130,839.50),
• £26,640.89 retained for further time costs and legal expenses (Litigation),
• The balance of cash (£40,000) applied towards protected moratorium debts (approx. 6p in £),
• Any recoveries from the Litigation to be ring-fenced for creditor proposal on distribution.

HMRC rejected these in part; otherwise, creditors simply did not engage.

The Legal Issues: What Did the Court Need to Decide?

The application to the court sought a direction under Paragraph 63 of Schedule B1 confirming that litigation costs and funding could be paid from recoveries before protected moratorium debts.

Key questions included:

1. Does the mandatory “must pay” in Paragraph 64A prevent administrators from paying any costs or expenses ahead of protected moratorium debts?
2. Is it permissible to enter funding agreements where the litigation funder ranks ahead of moratorium creditors, if this is the only way to unlock value for creditors?
3. How should administrators weigh their statutory duties, commercial judgment, and the interests of all creditors?

The administrators argued that:

• Funders will only support recoveries if paid from proceeds ahead of other claims.
• Administrators cannot reasonably be expected to work unpaid or at risk for expenses.
• The payment of litigation funding from proceeds is necessary and incidental to fulfilling their function, not a circumvention of statutory priority.
• All stakeholders benefit by unlocking value that would otherwise be lost.

The Court’s Decision: Paragraph 64A is Not an Absolute Bar to Paying Funding and Expenses First

ICC Judge Jones held in Re Cross Transport Ltd (In Administration) [2026] EWHC 1636 (Ch) that Paragraph 64A does not require every penny of moratorium debts to be paid before administration costs can be incurred or litigation funded.

• The “super priority” for moratorium debts does not mean an absolute entitlement to full payment ahead of all other costs and expenses.
• Administrators are entitled, in exercising their functions, to incur and pay necessary costs—including litigation expenses and funder repayments—if this advances the purpose of the administration and, ultimately, benefits the creditor pool.
• The judge noted that a strict reading would render many administrations impossible: “No one is going to work for free.” Actions that drive recoveries for creditors must remain possible.
• Precedent from Re Salmet International Ltd and Re Paramount Airways Ltd (No.3) was cited, supporting the principle that some expenses must be paid as the process unfolds.

What This Means in Practice: Stakeholder Breakdown

For Administrators and Insolvency Practitioners

You now have clear authority to enter into commercially justified litigation funding deals, and to pay funders out of recoveries ahead of moratorium creditors, if:

• The litigation advances the administration’s statutory purpose,
• The arrangement is commercially prudent,
• Creditors left behind by a strict approach are better off due to action taken.

For Directors

Directors whose companies exit a moratorium and enter administration with viable claims can see those claims pursued, opportunities maximised, and the likelihood of creditor recoveries improved, even if moratorium creditors are owed large sums. This also reduces the risk of criticism or sanctions for failing to support the best return for creditors.

For Protected Moratorium Creditors and Preferential Creditors

Your position as “super priority” creditor is protected and respected. However, a strict veto over administration costs and litigation funding would not serve your interests. The law now ensures that cost overlaps required to unlock substantial value can, with justification, be paid first where this will benefit you as a creditor.

For Litigation Funders

Post-moratorium administrations are now fundable, provided you work closely with administrators to ensure the claim makes commercial sense, due diligence is robust, and your terms are otherwise acceptable. Where appropriate, documentation and court directions should underpin the deal.

Key Takeaways

1. Paragraph 64A “super priority” for moratorium debts does not prevent administrators from paying litigation costs and funders from recoveries ahead of those debts, when justified.
2. Administrators can enter litigation funding deals ranking the funder ahead of protected moratorium creditors, provided the action meets statutory administration purposes and is within their functions and duties.
3. This decision unlocks many administrations where claims would otherwise be lost and gives creditors, including moratorium creditors, access to greater returns.
4. “Super priority” is not absolute pre-payment; it governs distribution, not a ban on all interim payments.
5. Administrators still need to exercise judgment—creditors retain the right to challenge if a decision is not in their interest.
6. Protection for unpaid administrator remuneration or expenses remains in place via statutory charges if the officeholder leaves with debts unpaid.
7. All parties benefit from this clarity: IPs, directors, creditors, funders.

How Go Legal Can Help

• We advise on claim strength and the prospects of recovery in administration, whether relating to director misfeasance, professional negligence, preferences or undervalue transactions.
• Our team structures litigation funding deals that comply with current law, applies for court directions where needed, and manages disputes between creditors, administrators and funders.
• We help directors understand personal implications, defend against misfeasance claims, and support best outcomes for all parties.
• Our solicitors represent creditors in challenging administrator decisions and acting to maximise creditor recoveries.
• If you are a litigation funder, we advise on structuring suitable agreements for post-moratorium administrations, and can assist with applications to the court.

We offer flexible fee arrangements and a free initial consultation to discuss your position and map your next steps.