Sky Building Ltd & Ors v HM Revenue and Customs & Ors

An order under paragraph 71 of Schedule B1 to the Insolvency Act 1986 is discretionary. The court must be satisfied both that the proposed sale is likely to promote the purpose of the administration and that the statutory conditions concerning the secured sums and market value can be met.

Because the order removes or alters existing property rights, the court must scrutinise the valuation and the interests and priorities of affected secured creditors. Untested or materially uncertain valuation evidence may be insufficient. Commercial urgency and the absence of an alternative proposal cannot justify making the order where the statutory market-value condition is not established.

Sky Building Limited and its proposed administrators applied for an order under paragraph 71 of Schedule B1 to the Insolvency Act 1986. The order was sought to permit a back-to-back sale of development property as though it were not subject to purchasers’ equitable liens.

The proposed transaction would have enabled the Company to acquire the property, redeem a later-ranking charge held by the Riley Creditors, and resell the property free of the purchasers’ liens. The proceeds would then have been distributed among lien holders. The application was opposed by creditors, particularly those whose liens were protected by registered notices and whose existing priority and negotiating leverage would be affected.

The central issues were whether the sale was likely to promote the purpose of the administration, whether the market-value condition in paragraph 71(3)(b) could be satisfied, and whether the court should exercise its discretion in the circumstances.

1. Paragraph 71 application refused. The court was satisfied that the proposed disposal was likely to promote the purpose of the administration because it could produce a distribution to secured creditors. That did not, however, determine whether the order should be made.
2. The statutory scheme required the court to be satisfied that the secured sums would be addressed and that the amount realised, including any necessary additional sum, would represent the market value contemplated by paragraph 71(3)(b) of Schedule B1. The requirement was important because the order would interfere with existing property rights.
3. The valuation evidence relied upon by the applicants was materially uncertain. It was based on significant assumptions, had not followed a more reliable “red book” valuation process, and had not been tested by responsive expert evidence or cross-examination. The substantially higher price offered by the proposed purchaser also raised an unexplained question as to market value. The court therefore could not be satisfied that the statutory condition would be met.
4. Urgency, the risk that the transaction would lapse, and the absence of a realistic alternative proposal could not cure that evidential failure. The court had to consider the position of creditors whose registered notices gave them priority and negotiating leverage. It would be wrong to ignore the commercial reality that the proposed acquisition would not occur unless the paragraph 71 order were made.
5. The court would not become the commercial decision-maker. The administrators were responsible for commercial matters, subject to supervision and challenge, while the court had to apply the statutory legal tests. In the circumstances, the interference with the creditors’ security was not justified and the objections of the affected creditors deserved considerable weight.
6. No paragraph 71 order was made. The court reserved the question whether the administration should continue, be rescinded, or be addressed under the specified provisions of Schedule B1.