UK High Court confirms administrators can prioritise funding costs over 'super priority' creditor

In a decision with significant implications for the UK litigation funding market, the High Court has confirmed that insolvency administrators can enter into litigation funding agreements and pay funders ahead of so-called 'super priority' creditors, where doing so serves the purposes of the administration.

The ruling in Re Cross Transport Ltd (In Administration) [2026] EWHC 1636 (Ch), handed down on 30 June 2026 by ICC Judge Jones, resolves a tension that has been a growing concern in the insolvency market, not only in the UK but also in other jurisdictions applying similar insolvency rules.

The background

Cross Transport Ltd entered a moratorium in March 2023. A moratorium is a short 'breathing space' designed to protect financially distressed companies from creditor action. During that moratorium, it incurred debts totalling approximately £643,000, owed to what the legislation calls 'Protected Moratorium Creditors'. This special category may include, without limitation, debts and liabilities that have been incurred during the moratorium, for example, from creditors that provided goods and services to the debtor during the moratorium.

This special treatment is not unique to the UK insolvency system. Other insolvency systems apply the same or similar rules. In Spain, for example, these super priority claims are referred to as 'creditos contra la masa'. Both UK protected moratorium debts and Spanish créditos contra la masa are designed to protect certain claims that the insolvency system treats as especially important to the functioning of the restructuring or insolvency process. They sit above ordinary unsecured creditors and are paid with a degree of priority.

Going back to the case, when the company subsequently entered administration, its remaining assets were modest and included set of litigation claims potentially worth over £1 million. The problem was straightforward but serious. The Insolvency Act 1986 (as amended) requires administrators to pay Protected Moratorium Creditors with 'super priority', meaning they rank ahead of almost all other claims. However, the litigation funder, Pythagoras Capital Limited, indicated it would withdraw funding for existing proceedings and decline to fund further claims unless it could be guaranteed recovery ahead of those super priority creditors.

The issue was that without funding, the litigation could not proceed, and without the litigation, there would be insufficient assets to pay anyone.

The core issue for litigation funders

The concern is easy to understand. If an administrator is legally obliged to pay super priority creditors first, and if the only route to meaningful asset recovery is through litigation, a funder faces the risk that any proceeds will be immediately absorbed by those priority claims, leaving nothing to repay the funder's investment, let alone generate a return.

The Court's analysis

ICC Judge Jones rejected the proposition that super priority equates to an absolute right to be paid before any other costs are met. The judge held that the statutory obligation to pay Protected Moratorium Creditors must be read in the context of the administration as a whole. Interpreting the provision otherwise, would produce an 'absurd' result preventing administrators from taking steps that would ultimately increase the total pool of assets available for distribution, such as in this case, including funding litigation.

The court emphasised several key points:

•  '[S]uper-priority does not equate to absolute entitlement to pre-payment'. The duty to pay Protected Moratorium Creditors is a duty of ultimate priority in distribution, not a prohibition on incurring costs or paying expenses in the meantime.
• Administrators retain managerial discretion. They can and must exercise judgment about how to deploy resources to fulfil the purposes of the administration.
• The 'no worse off' logic applies. In this case, the judge noted that funding the litigation could at worst leave the Protected Moratorium Creditors no worse off than they would be without the litigation, and at best significantly increase the assets available for distribution to them.

What does this mean for Litigation Funders?

The decision provides welcome clarity for funders operating in the insolvency space in the UK and an interesting point of comparison to other jurisdictions, such as Spain.

Going forward, funders can take comfort that the court recognises their role as tool within the machinery of insolvency litigation. Where the economics of a case mean that litigation will not proceed without external funding, the court has confirmed that administrators have the power to agree terms that protect the funder's return, provided the arrangement is consistent with the purposes of the administrator's duties.

However, the judgment also contains an important limitation. The court stressed that it was ruling on principle, not on the specific terms of any particular funding agreement. Whether a given arrangement is appropriate will depend on its facts. Administrators will still need to exercise careful judgment, and funders may expect that the reasonableness of their terms may come under scrutiny.

Guido Demarco is the Head of Legal Assets at Stonward Litigation Finance.