Administrators can sell fixed charge assets

Re: Musion Systems Ltd [2014] EWCA Civ 639 illustrates paragraph 71, Schedule B1 (“Sch B1”), Insolvency Act 1986 and endorses the sale by administrators of assets subject to a fixed charge.

Background

The company provided holographic illusion services at events organised by its customers. Three founder-directors had seriously fallen out and become litigious during 2012-13. One director was removed by the others with effect from 31 May 2013. He then precipitated the company’s insolvency by having a related company present and publicise a winding-up petition in early July 2013. Another director sought to appoint administrators on 23 July 2013 under powers said to be contained in a debenture. The removed director, who was also a party to the debenture, objected to the appointment and the administrators were discharged and re-appointed (with effect from 23 July) by the High Court on 9 August 2013, when two additional administrators were appointed.

This then was the setting – one of extreme antagonism and hostility – for the administration.

The administrators sought to preserve the business as a going concern, initially within the company but alternatively through a sale. All the related parties, and others, became involved in bidding for the business and assets. Bids were exhaustively revised, withdrawn and reinstated. There proved to be no realistic prospect of rescuing the company. The fixed and floating charge debenture appeared to secure some £15,000 of directors’ loans, so it was necessary for the administrators to obtain the consent of the debenture holders or the court to sell the intellectual property assets that were subject to the fixed charge. One of the debenture holders (the one removed as a director in May) refused to consent and he also opposed the administrators’ application to court. A sale was finally negotiated, but it was subject to the administrators obtaining the necessary consent or order, without which there would be no going concern sale and realisations would be limited to liquidation values.

Law

Although an administrator may dispose of assets subject to floating charge security as if it were not subject to the charge, (paragraph 70, Sch B1) fixed charge security is more tenacious and the relevant relief is governed by paragraph 71.

71 (1) The court may by order enable the administrator of a company to dispose of property which is subject to a security (other than a floating charge) as if it were not subject to the security.

71 (2) An order under sub-paragraph (1) may be made only –

• on the application of the administrator, and
• where the court thinks that disposal of the property would be likely to promote the purpose of administration in respect of the company.

71 (3) An order under this paragraph is subject to the condition that there be applied towards discharging the sums secured by the security

• net proceeds of disposal of the property, and
• any additional money required to be added to the net proceeds so as to produce the amount determined by the court as the net amount which would be realised on a sale of the property at market value.

First Instance Decision

Warren J allowed the administrators’ application unconditionally and in full, permitting them to sell any assets subject to fixed charge security as if they were not so subject (but, of course, the statutory condition of paragraph 71(3) applied). Warren J, however, permitted an appeal. The opposing debenture holder sought to challenge the judge’s exercise of his discretion on 17 grounds.

Court of Appeal

The Court of Appeal considered carefully all the grounds put forward by the appellant. Key points were:

• (per Knox J in re AVR Aviation Ltd [1989] BCLC 644) “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 purposes specified in the administration order if it is not.”
• Significant interference with the rights of the fixed charged holder to realise his security at a time and in a manner of his own choosing is the inevitable consequence of an order under paragraph 71.
• Whether a proper price had been achieved was the challenge of 10 of the points of claim in this case, but the Court of Appeal was satisfied that that administrators had achieved a proper price for the business and assets.
• The appeal was dismissed completely.

Lessons

1. Endorsement of the practice of the courts not to interfere with the commercial decisions of administrators.
2. Endorsement of the principle of judicial discretion being a balancing exercise.
3. Clarification that it is only the interests of the secured creditor as a secured creditor (and not in any other capacity) that are taken in to account.
4. A marketing exercise and a competitive sale process is an appropriate and definitive way to determine the hitherto uncertain value of assets.
5. Recognition that urgent applications may make things difficult for the parties and the court, but this should not cause the proper exercise of judicial discretion to be limited.

Chris Laughton and Peter Godfrey-Evans, partners in Mercer & Hole, were the additional administrators appointed on 9 August 2013.