Selling assets subject to fixed charge security

How will the court approach determining whether assets subject to fixed charge security can be sold in the context of an insolvency? Chris Laughton, a restructuring and insolvency partner at Mercer & Hole, examines what a recent Court of Appeal decision could mean for lawyers and their clients.

Original news

Rollings (as Joint Administrators of Musion Systems Ltd) v O’Connell [2014] EWCA Civ 639, [2014] All ER (D) 210 (May)

The defendant appealed against the judge’s order that the claimant administrators be permitted to sell the assets of a company, which were subject to a fixed charge security held by the defendant, as if they were not subject to that security. The Court of Appeal, Civil Division, in dismissing the appeal, held that judge had approached the matter correctly, had properly taken into account the matters to which he had been bound to have regard and had come to a conclusion which had fallen well within the bounds of a reasonable exercise of his discretion.

What was the background to the case?

The case was about administrators making an application under the Insolvency Act 1986, Sch B1, para 71 to the court to enable them to sell assets subject to a fixed charge as if they were not subject to that fixed charge. The High Court order that they could do so was appealed, but the appeal was dismissed.

Musion Systems provided holographic illusion services at events. There were three founder directors who seriously fell out and became litigious between 2012 and 2013. One of the founder directors was removed by the others and he precipitated the company’s insolvency by having a related company, which he controlled, present a winding up petition in early July 2013. Another of the directors sought to appoint administrators on 23 July 2013 by powers contained within a debenture. The removed director, who was party to that debenture, objected and the administrators were discharged and reappointed by the High Court. They were reappointed with effect from 23 July 2013. Two additional administrators (I was one of them) were appointed on 9 August 2013. The reason for the additional administrators was to have somebody acceptable to all parties. The situation was one of extreme antagonism. I have never seen such hostility in my 30 years in insolvency.

It became clear there was no realistic possibility of rescuing the company. We had to seek to sell the business and assets to realise value for creditors. All the warring parties, and others, were involved in bidding for the assets. Bids were constantly being revised, withdrawn and reinstated. We were required to apply to the courts—as administrator if what you are trying to do is to sell assets subject to a fixed charge, free of that charge, then you need either the consent of the charge holder or an order of the court under para 71. The debenture holder, who was the director who had been removed, declined to consent and therefore we were obliged to go to the court to seek an order under para 71. We had by that time negotiated the sale but the sale was subject to the debenture holder’s consent or an order that the assets would be sold not subject to a charge—otherwise the purchaser would be buying assets over which somebody else had security.

What is the relevant law involved?

Although an administrator may dispose of assets subject to a floating charge security as if it were not subject to the charge, a fixed charge security is rather more tenacious. The way to obtain relief if you cannot get consent is set out in para 71:

‘(1) The court may by order enable the administrator of a company to dispose of property which is subject to a security (other than a floating charge) as if it were not subject to the security

(2) An order under sub-paragraph (1) may be made only-

(a) on the application of the administrator, and

(b) where the court thinks that disposal of the property would be likely to be promote the purpose of administration in respect of the company.

(3) An order under this paragraph is subject to the condition that there be applied towards discharging the sums secured by that security—

(a) the net proceeds of disposal of the property, and

(b) any additional money required to be added to the net proceeds so as to produce the amount determined by the court as the net amount which would be realised on a sale of the property at market value.

(4) If an order under this paragraph relates to more than one security, application of money under sub-paragraph (3) shall be in the order of the priorities of the securities.’

What did the court decide? What factors were taken into account by the court in its decision?

In an unreported judgment in the High Court, Mr Justice Warren allowed the application unconditionally and in full, permitting the administrators to sell any assets that were subject to fixed charge security as if they were not subject to that security. Mr Justice Warren permitted an appeal and the debenture holder did appeal.

The Court of Appeal considered carefully all the various grounds put forward by the appellant—17 in all. The first key point was the principle upon which the court should deal with para 71. The Court of Appeal quoted Mr Justice Knox in Re ARV Aviation Ltd [1989] BCLC 664 saying that the court has to undertake ‘a balancing exercise between the prejudice that will be felt if the order is made by the secured creditor, against the prejudice that would be felt by those interested in the promotion of the purposes specified in the administration order if it is not’. This was considered pretty fundamental to the whole question of para 71. It was held that the court below had conducted the balancing exercise properly.

The second important point is that significant interference with the rights of the fixed charge holder to realise his security at a time and in a manner of his own choosing is the inevitable consequence of an order under para 71. The last key point is the issue of ‘proper price’. The Court of Appeal was perfectly satisfied that the administrators had achieved a proper price for the business and assets.

Why is this case important for restructuring and insolvency professionals?

This decision endorses the practice of courts not to interfere with the commercial decisions of administrators. Second is the endorsement of the principle of the court’s discretion and the ‘balancing exercise’ to be undertaken in the exercise of that discretion. Thirdly, this case clarifies that it is only the interest of the secured creditor as a secured creditor that should be taken into account in this balancing exercise. This particular secured creditor had a lot of other interests—as competitor, unsecured creditor etc—and was seeking to identify prejudice to those other interests. Fourth, a marketing exercise and a competitive sales process is an appropriate and definitive way to determine the hitherto uncertain value of assets. Finally, recognition that urgent applications to the court may make things difficult for the parties and indeed for the court, but this should not cause the proper exercise of judicial discretion to be limited. The Court of Appeal found in this case that all the urgency, difficulties and time pressure did not in fact hinder the exercise of judicial discretion.

Further reading

If you are a LexisPSL Subscriber, click the links below for further information on charged property in an administration:

The administrator and charged property (Subscriber access only)

The moratorium in administration (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you.

Interviewed by Jon Robins.

The views of News Analysis interviewees are not necessarily those of the proprietor.

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