O'Connell v Rollings

The Court of Appeal dismissed the appeal and upheld Warren J's order permitting the administrators to sell company assets subject to a fixed charge as if they were not subject to that security pursuant to paragraph 71 of Schedule B1 to the Insolvency Act 1986. The court emphasised that the power under paragraph 71 requires a balancing exercise between the prejudice to the secured creditor and the prejudice to those interested in the purposes of the administration; the judge had properly carried out that balancing exercise.

The judge accepted (for the purposes of the hearing) the appellant's claim to be a secured creditor but found the administrators had conducted an open and adequate marketing process, faced urgent commercial pressures and had obtained a proper price by testing the market. The risk that the sale would be lost if not sanctioned was real, and the order was therefore likely to promote the purpose of the administration. The appeal court admitted additional evidence on the appeal but held it would not have altered the outcome.

Background and procedural posture: The administrators of Musion Systems Limited applied under paragraph 71 of Schedule B1 to the Insolvency Act 1986 for an order enabling them to dispose of property subject to a fixed charge as if it were not subject to that security. Warren J granted the order on 26 September 2013. The fixed charge holder, Mr O'Connell, appealed, arguing the application should have been adjourned or refused and seeking permission to adduce further evidence on appeal.

Nature of the application and relief sought: An order under paragraph 71 to permit sale of assets free of a fixed charge, subject to the condition in paragraph 71(3) that proceeds be applied to discharge the secured sums.

Issues framed by the court:

• Whether the judge should have adjourned the application to allow fuller preparation and representation or until the creditors' meeting or arbitration;
• Whether the administrators had tested the market adequately and obtained a proper price;
• Whether the judge properly balanced the prejudice to the secured creditor against the prejudice to the administration constituency;
• Whether further evidence should be admitted on appeal and, if admitted, whether it would probably have affected the result.

Court's reasoning: The court (Kitchin LJ, with agreed judgments) admitted the appellant's further evidence because the hearing had been convened at short notice and the evidence was relevant and apparently credible, but allowed the administrators to file responsive evidence. Substantively, the court confirmed that paragraph 71 requires a balancing exercise: the judge had assumed, for the hearing, the appellant's secured claim and assessed the marketing and sale process. He concluded the administrators had undertaken an open and adequate marketing exercise, were faced with pressing cash needs and liabilities (rent, payroll), and there was a real risk that the purchaser would withdraw absent a court order. The judge was entitled to conclude that the sale would likely promote the purpose of administration. The appeal court found no error in the judge's exercise of discretion and dismissed the appeal.

Subsidiary findings: the court noted issues about competing bidders (Textor, Solutions Diverse), the uncertain value of intellectual property (subject of separate arbitration), that claims against third parties were excluded from the sale, and that one creditor (Maass) retained voting rights despite waiving claims — none of which required interference with the judge's discretion.

Appeal dismissed. The Court of Appeal held that Warren J properly exercised his discretion under paragraph 71 of Schedule B1 by balancing the prejudice to the fixed charge holder against the prejudice to those interested in the administration, having regard to the administrators' urgent commercial pressures, an adequate marketing process and the real risk that the sale would be lost if not sanctioned. Further evidence was admitted on appeal but would not have changed the outcome.

This is an appeal from the High Court of Justice, Chancery Division, Companies Court (Warren J), judgment and order dated 25 and 26 September 2013 (No. 5598 of 2013). Permission to appeal was granted by the judge below.