Edwards & Ors v Hammersley

Discharge of administrators is ordinarily the normal consequence of an administration ending. The court should not postpone discharge indefinitely merely because a possible claim is asserted unless the claim falls within paragraph 75 of Schedule B1 to the Insolvency Act 1986. Discharge does not prevent a properly permissioned paragraph 75 application concerning earlier conduct. A later court should not go behind an unappealed administration order, absent a proper basis for doing so. In assessing insolvency, fair market value rather than book value is relevant. Where a company is insolvent, its shareholders have no right to a surplus until creditors are paid in full.

The former administrators of Paragon Offshore plc applied for an order specifying the time at which their discharge would take effect under paragraph 98(2)(c) of Schedule B1 to the Insolvency Act 1986. The administration had implemented a US Chapter 11 restructuring and had ended when Paragon entered creditors’ voluntary liquidation.

A shareholder opposed discharge. He alleged that Paragon had not been insolvent, that assets had been wrongly transferred under the restructuring, that a loan note instrument was invalid, and that the administrators and their advisers had acted fraudulently or improperly. The central issue was whether any of those matters justified withholding or postponing the administrators’ discharge.

1. The application was granted. The former administrators’ discharge was directed to take effect 14 days after judgment.

2. Discharge under paragraph 98 is ordinarily granted shortly after an administration ends. Re Angel Group [2016] 2 BCLC 509 confirmed that the court should not circumvent the statutory limits of paragraph 75 by postponing discharge indefinitely. Paragraph 75 preserves the possibility of a claim concerning misapplication of property, accountability, breach of duty or misfeasance, subject to permission where the administrator has been discharged.

3. The court was not entitled to go behind the earlier administration order made by Mrs Justice Rose. There had been no appeal, and the order could not be reopened on the shareholder’s unparticularised allegations of fraud.

4. In any event, the evidence established that Paragon was insolvent. The relevant liabilities included the obligations under the Term Loan Guaranty and other secured and unsecured debt. Fair market value, rather than book value, was the appropriate valuation basis. The shareholder had produced no evidence establishing a surplus or any return to equity.

5. The shareholders had no proprietary entitlement to the assets of Paragon’s subsidiaries. The restructuring transferred or reorganised assets and liabilities in accordance with the approved Fifth Plan and UK Implementation Agreement. The Loan Note Instrument formed part of that implementation and had not been shown to be invalid.

6. The allegations concerning the jurisdiction of the US Bankruptcy Court, the Noble claims, and fraud or misconduct did not provide a proper basis for refusing discharge. No paragraph 75 application had been issued, and the allegations were unsupported and insufficiently particularised.