UK: Scotland: administration - termination of contracts

Lord Hodge, sitting in the Court of Session (Outer House), gave his opinion last Friday in Clark and Whitehouse (administrators of Rangers Football Club plc) 2012 CSOH 55. The case concerned an application for directions by administrators with regard to the test which they, or the court, should apply in determining whether they could be prevented from causing Rangers to terminate agreements under which Rangers had sold season tickets for the seasons from 2011-2012 to 2014-2015. Lord Hodge observed (at para. [51] to [53]):

While it is not uncommon for an administrator to sell a company's business or assets promptly, there are many administrations which, for various reasons, continue for several years before moving to a creditors' voluntary winding up or directly to dissolution.

It is against this background of statutory provision and practice that the administrator has to decide whether to repudiate a contract. Administration is, as I have said, a flexible process. It can accommodate a circumstance in which a company, which was thought to be or likely to be insolvent, turns out not to be so and can emerge from the administration without having reached a compromise with its creditors. In such a circumstance it is hard to envisage how an administrator could properly repudiate a contract in exercise of his function of attempting to achieve the objective of rescuing the company as a going concern. But where, as in the normal run of administrations, the company is insolvent and will not emerge from administration without a CVA or a scheme of arrangement with its creditors, the administrator has to consider whether he should decline further performance of a contract which would prejudice the achievement of an otherwise achievable statutory objective. In reaching a view on that matter he is under a statutory duty to act in the interests of the company's creditors as a whole: para 3(2) of Schedule B1. Thus he must consider the extent and effect on the company's other creditors of the claim in damages which would arise if a party contracting with the company accepted his repudiation. He must also consider, when addressing the interests of the creditors as a whole, the interests of the contracting party who, if the contract is repudiated, may be a creditor in a claim for damages.

An administrator would not be acting in breach of his duty to the company if he refused to perform a contract having acted reasonably to satisfy himself that the continued performance of the contract (i) would impede his achievement of the objectives of the administration and (ii) was not in the interests of the company's creditors as a body. If he could establish reasonable grounds for being so satisfied, I consider also that he would be likely to have the legal justification which would exclude a personal liability to the counterparty of a company's contract for inducing the company to break that contract."