For reasons explained in this blog, they did not in the case of Conway and others v Plass and others [2025] EWHC 2625 (Ch) but there could be situations where it might.

In Conway and others v Plass and others, the High Court has provided guidance on when contract liabilities incurred by administrators will be treated as administration expenses under the Lundy Granite principle.

Factual Background

Argentex LLP (the Firm) was an e-money institution specialising in payment and exchange services and offered customers spot, forward and option foreign exchange contracts. The Firm had historically mitigated the risk of their forward contracts by taking out corresponding hedging contracts with a bank. Shortly before the Firm entered special administration, the bank terminated the hedging contracts, resulting in the forward contracts no longer being hedged and the Firm not having the same ability to fulfil the contracts at maturity. The Joint Administrators (JAs) initially sought to sell the business however, this was unsuccessful and as such the JAs were under a duty to recover sums owed to the Firm. The JAs planned to do so by closing out the customer contracts and pursuing the debts owed to the Firm.

As a consequence of closing out the contracts, a number of creditors were owed money by the Firm (dubbed ‘in the money’ (ITM) customers). The question then arose whether these claims should rank as unsecured claims or whether the claims should be paid as an expense of the administration.

Administration Expenses and the Lundy Granite Principle

Administration expenses refer to expenses paid out of the assets of a company in an order of priority and notably enjoy a higher ranking upon the distribution of company assets. The contract liabilities of the ITM customers would not usually be considered as administration expenses because the contracts were entered into before the administration period began (they would not fall under (a) or (g) of Section 98 of the Payment and Electronic Money Institution Insolvency (England and Wales) Rules 2021). However, the ITM customers argued their contract liabilities may become administration expenses by virtue of the Lundy Granite principle – a principle developed in the Lundy Granite case.

For the principle to apply, the contract must be entered into before the onset of insolvency, be in force after insolvency began, and the office holder must have electedto retain the benefit of the contract for the purposes of the insolvency process.   The benefit of course being that administration expenses are more likely to be paid back in full than other debts which rank lower in the insolvency waterfall.

The Judgment

The case turned on whether or not the act of closing out the contracts was considered an election which adopted the contract for the benefit of the administration estate or not. The Court determined that closing out the contracts did not grant any benefit to the administration estate, the Lundy Granite rule did not apply as a result, and the ITM customer debts would not be classified as administration expenses. The Court accepted that by closing out the outstanding contracts, the JAs would have a precise sum of the debts due to the Firm but decided that this was not sufficiently beneficial.

The Court also clarified that, had the JAs ‘done nothing’ and left the contracts standing, then the Lundy Granite principle would not apply either as there must be some action on the part of the JAs that could be considered an election.

However, it should not be assumed that terminating a contract will never engage the Lundy Granite principle. In some cases terminating a contract may benefit the administration estate and the judgment offers a couple of examples.  Such as enabling property to be retained for the benefit of the administation, improving recoveries or providing the prospect of improving recoveries