Clare Kennedy & Ors v Fonds Rusnano Capital SA

Applications under paragraph 71 of Schedule B1 to the Insolvency Act 1986 require a two-stage assessment. The court must be satisfied that the disposal is likely to promote the purpose of the administration and that the secured creditor will receive the statutory market-value protection.

Market value is assessed on the facts confronting the administrators. The court need not assume that a willing vendor can delay a sale in the hope of obtaining a better offer. Relevant circumstances include urgency, available funding, marketing constraints, fragmented ownership, sanctions and the evidence of value. The court must also balance the prejudice to the secured creditor against the prejudice to those interested in promoting the administration.

The joint administrators of four English companies applied under paragraph 71 of Schedule B1 to the Insolvency Act 1986 for authority to sell fixed-charge assets free of the respondent’s security. The applications concerned a connected-party pre-pack sale of a pharmaceutical and medical-device business.

The respondent did not participate in the applications, although the court was satisfied that service had been validly effected. The administrators relied on an accelerated marketing process, an evaluator’s report and expert valuation evidence. The central issues were whether the sale was likely to promote the purposes of the administrations, whether the paragraph 71(3) market-value condition was satisfied, and how the court should exercise its discretion.

1. Statutory test. Paragraph 71 imposed two stages. The court had to be satisfied that disposal of the secured property was likely to promote the purpose of the administration. It also had to require application of the net sale proceeds and any additional sum needed to produce the amount determined as the net amount which would be realised at market value.
2. Purpose of administration. The sale as a going concern was likely to produce a better result for creditors than liquidation, preserve employment and enable distributions to secured creditors. The evidence showed that, without the orders, the companies were likely to enter liquidation and the sale would fail.
3. Market value and proper price. Following the approach in O’Connell v Rollings [2014] EWCA Civ 639, the question whether a proper and fair price had been obtained was fact-sensitive. Paragraph 71 did not require a hypothetical exercise in which a willing vendor could wait indefinitely for better offers. The compressed marketing period, lack of funding, sanctions-related restrictions, fragmented ownership and uncertainty concerning the Maltese assets were relevant to value. The evaluator’s report, Gordon Brothers’ probability-based valuation and Mamo’s opinion provided sufficient evidence that the £720,000 allocation to the fixed-charge assets represented a proper price.
4. Discretion and prejudice. The court had to weigh the prejudice to the secured creditor against the prejudice to those interested in promoting the administrations. The respondent would lose the ability to realise its security itself, but was no worse off than it would have been on a sale by it, given the same funding and market constraints. The interests of the creditors, employees and the continuation of the business supported making the orders.
5. Net proceeds. Applying Townsend v Biscoe [2010] WL 3166608, proper costs and expenses reasonably incurred in preserving and realising the fixed-charge assets could be deducted. This included administrators’ remuneration and the costs of solicitors, counsel, valuation evidence and related professional work. The claimed deductions were properly incurred and were allowed.
6. The paragraph 71 orders were therefore made in the terms previously ordered, authorising disposal of the fixed-charge assets free from the respondent’s security.