O'Connell v Rollings & Ors (Administrators of Musion Systems Ltd)

When administrators seek authority to dispose of property free from a fixed charge under paragraph 71 of Schedule B1 to the Insolvency Act 1986, the court must balance the prejudice to the secured creditor against the prejudice to those interested in promoting the purpose of the administration. The administrators must propose a sale at a proper price.

Urgency and commercial pressure may justify a sale before a creditors’ meeting. Administrators should nevertheless consult creditors so far as circumstances permit and consultation is reasonable. A secured creditor’s interest deserves particular regard but does not confer a veto over a sale likely to achieve a better result for creditors as a whole.

The administrators of Musion Systems Ltd applied under paragraph 71 of Schedule B1 to the Insolvency Act 1986 for permission to sell the company’s business and assets as if they were not subject to the appellant’s fixed charge. Warren J granted the application after an urgent two-day hearing, subject to the statutory protection for the charge-holder.

The appellant appealed with the judge’s permission. He argued that the application should have been refused or adjourned, challenging the price, marketing process, contract race, treatment of intellectual property rights, consideration of creditors’ interests and procedural fairness. The Court of Appeal admitted further evidence from both sides. The central issues were whether the judge had erred in exercising his paragraph 71 discretion or in refusing an adjournment.

1. Appeal dismissed unanimously. Kitchin LJ, with whom Floyd and Fulford LJJ agreed, held that Warren J had approached the paragraph 71 discretion correctly and reached a conclusion well within the bounds of a reasonable exercise of that discretion.

2. The jurisdictional condition was that the disposal was likely to promote the purpose of the administration. That condition had been found to exist and was not challenged. In exercising the resulting discretion, the court had to satisfy itself that the administrators proposed to sell at a proper price. It then had to balance the prejudice to the fixed charge-holder against the prejudice to those interested in promoting the administration’s purpose. Re AVR v Aviation Ltd [1989] BCLC 664 was applied.

3. The administrators had obtained a proper price. They had conducted a wide marketing exercise, tested the market and reasonably treated the two principal offers as comparable. Given diminishing funds, accruing employment and rental liabilities, uncertainty over the intellectual property licences and one bidder’s repeated changes of position, the administrators were entitled to conduct a contract race and accept the offer that produced a binding agreement. Potential third-party claims remained vested in the company.

4. The order significantly interfered with the charge-holder’s ability to realise his security at a time and in a manner of his choosing. That consequence was inherent in paragraph 71 where the charge-holder opposed the sale. His position required particular regard, but it did not prevent a sale which was likely to achieve a better result for creditors as a whole than liquidation. The judge properly considered the interests of other actual and potential creditors, employees and landlords.

5. Commercial urgency may require administrators to act before a creditors’ meeting. The more pragmatic approach in In re T & D Industries Plc [2000] 1 WLR 646 applied equally to an application under paragraph 71. Administrators should consult creditors where circumstances permit and it is reasonable, but the content, manner and consequences of consultation depend on the individual case. Here the judge knew the positions of creditors representing most of the debt by value and was entitled to proceed.

6. The urgent hearing remained fair. The appellant had advance notice that an application might be needed, received draft papers four clear days before the hearing, presented his objections effectively and was represented by counsel on the second day. The risk of losing the sale and incurring substantial further liabilities justified the case-management decision not to adjourn. The application to adduce further evidence was allowed, but that evidence did not justify disturbing the order.

1. Court of Appeal (Civil Division): The further evidence of both parties was admitted, but the appeal was dismissed. Warren J’s exercise of discretion and refusal to adjourn were upheld: [2014] EWCA Civ 639.
2. High Court, Chancery Division, Companies Court: Warren J granted the administrators’ application under paragraph 71 of Schedule B1 to the Insolvency Act 1986, subject to the statutory condition protecting the charge-holder. No citation is stated in the judgment.