Insolvency – Administration order – Sale of property – Claimant company applying for order enabling administrators to sell property subject to security – Whether appropriate to make order to allow sale of property as though not subject to purchasers’ liens – Claim dismissed
The claimant company was developing a property it then owned at Jubilee Baths, Brunswick Street, Newcastle-under-Lyme. It had granted leases for 145 flats and exchanged contracts for the grant of leases for 143 flats being built to provide an investment opportunity from student sub-lettings. Those leases gave rise to purchasers’ liens, a form of equitable charge over the property, some of which were protected by the registration of notices against the property’s title under the Land Registration Act 2002.
The company had serious financial difficulties and was refinanced on terms that resulted in the freehold being transferred to another company (SAL) with the claimant having an option to buy back the property for the same price as that stated for the transfer. Following the transfer, a number of contracts were entered into with the intention of achieving a back to back sale of the property. It was proposed that SAL would sell the freehold title to the claimant free from registration of the charge on payment of a consideration of £2,747,000 to be raised by the claimant from the purchase price to be paid upon the back to back sub-sale to D Ltd. Those with notices would continue to be secured against the property when owned by the claimant which would transfer the freehold title to D Ltd, which would become the freehold owner with unencumbered title, for £3,347,000. Valuation evidence from the claimant was that £600,000 represented market value for the sale of the freehold title subject to existing leases but without any encumbrance in the charges register.
In order to achieve the sale and sub-sale, the court made an administration order in respect of the claimant. The claimant also sought an order under paragraph 71 of schedule B1 to the Insolvency Act 1986 to enable the administrators to sell the development property as though it was not subject to purchasers’ liens resulting from the exchange of contracts for the grant of long leases over the flats.
Held: The claim was dismissed.
(1) Paragraph 71 conferred a discretionary power upon the court to order that the sale by a company in administration to a third party could take place as though the property was not subject to the purchasers’ liens. That discretion existed when the company owned the property. That was a back to back sale and there would be a moment of ownership by the company when an order could take effect. However, the order could only be made if the court thought the sale would be likely to promote the purpose of the administration and it was right to exercise its discretion. In addition, paragraph 71(3) provided that the order was subject to the condition that the net proceeds of sale had to be applied towards discharging the sums secured. Further, there should be added to the net proceeds of sale any additional sum required to produce the net amount the court determined would be realised on a sale at a market value, as defined in paragraph 111(1) of schedule B1.
That provision was important to the decision whether to grant an order under paragraph 71. Its existence emphasised that the effect of the order was to infringe property rights belonging to others and the need to comply with the first protocol of part II of schedule 1 to the Human Rights Act 1998. It recognised that a sale by a company subject to an insolvency regime might not produce the amount which would be realised by a sale in the open market to a willing vendor. It also required the secured creditor to receive that market value and meant that the court had to have valuation and other necessary financial evidence to assure it that the condition would be satisfied.
(2) It was important to distinguish commercial from legal decisions. The former, for example whether this was a proper purchase price for the claimant to pay and to receive in the context of its administration and its purposes, was for the administrators subject to challenge before the courts, when the courts would decide whether the administrators were acting within their powers and duties. The court would not become the commercial decision maker. It was for the court to apply and decide the legal tests.
In the present case, the court was satisfied that the first requirement of paragraph 71 was met. Disposal of the property to D Ltd would be likely to promote the purpose of administration because it would result in a distribution to one or more secured creditors.
(3) The issue of market value was relevant to the issue whether the condition of an order for sale provided by paragraph 71(3)(b) could be met and to the exercise of the court’s discretion. In this case, the claimant’s expert evidence was that the market value of the property was £600,000. However, that evidence had not been tested by expert evidence in answer or cross-examination. Further, the fact that D Ltd had been willing to pay £3,347,000 for the property raised the question of why the market value had been so much lower, which had neither been explained nor answered. Accordingly, the evidence of the market value of the property had been inadequate. On the untested evidence before the court, it could not be satisfied of market value or that the condition prescribed by paragraph 71(3)(b) would be met. That being so, the court could not decide to make an order because of the absence of a realistic alternative proposal; such an approach would also risk crossing the boundary into commercial decisions. Therefore, it would not be right to exercise the court’s discretion to make an order under paragraph 71.
That conclusion was supported by the fact that the majority of creditors appeared to oppose the application. Even if there was cause for doubt over the knowledge of some, there was no creditor with a purchaser’s lien who supported it. The court had to have regard to the objections of those creditors with notice of the hearing who had decided to oppose it. Their objections had to be given considerable weight when exercising the court’s discretion.
Bridget Williamson (instructed by JMW Solicitors LLP) appeared for the claimants; Steven Fennell (instructed by Bermans (2012) Ltd) appeared for the second respondents.
Eileen O’Grady, barrister
