The rights of fixed charge creditors are restricted in an administration. Such creditors cannot realise assets subject to their security at a time or in a manner of their own choosing. However, with the consent of the court pursuant to paragraph 71, Schedule B1, Insolvency Act 1986, and subject to statutory safeguards, an administrator can sell fixed charge assets as if they were not subject to the security.
In Re Musion Systems Ltd [2014] EWCA Civ 639, the Court of Appeal upheld a para 71 order and examined, in some detail, the exercise of judicial discretion in making the order.
I declare an interest as one of the company’s administrators.
In dismissing all the points advanced by the appellant, Kitchen LJ (with Floyd and Fulford LJJ in agreement) made clear that it was not necessary for the administrators to produce evidence as to the value of sums secured by the debenture or that there would be sufficient funds available to pay the secured creditor. Rather, he endorsed the statement of Knox J in Re ARV Aviation Ltd [1989] BCLC 664:
“The court has to make a balancing exercise between the prejudice that will be felt if the order is made by the secured creditor, against the prejudice that would be felt by those interested in the promotion of the purposes specified in the administration order if it is not.”
The second key consideration was for the court to satisfy itself that the administrators were proposing to sell the business and assets at a proper price. Having examined carefully the sale process, which included “a wide and exhaustive marketing exercise” and concluded with a contract race, Kitchen LJ said:
“I am therefore satisfied that the Administrators did ascertain the value of the business and assets of the company, including its intellectual property rights, such as they were, by testing the market, and doing so in a perfectly sensible and adequate way. Faced with rising costs and diminishing assets, they were naturally concerned to secure a sale as soon as reasonably possible. That is precisely what they did and I am satisfied that, in doing so, they obtained a proper price.”
In conclusion, the Court of Appeal endorsed the administrators’ actions and the decision of Warren J in the High Court:
“The Administrators therefore decided to conduct a marketing exercise and then a competitive sale process with a view to selling the business and assets of the company, such as they were, for a fair and proper price. The sale realised a substantial sum, enabled a transfer of the company’s 17 employees and avoided the accrual of further liabilities. Had the sale fallen through, there was a real risk the Administrators would have been forced to put the company into liquidation. In all these circumstances no basis has been shown for this court to interfere with the exercise by the judge of his discretion in the way that he did.”
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