Can UK Administrators Apply For Conditional Discharge of Liability?
The court has recently confirmed that it does have jurisdiction to grant administrators a conditional discharge of liability but decided not to do so in the case of Re Central Properties Holdings Ltd (in administration) .
In this blog, we consider why the court refused to make that order and whether there are any circumstances in which a court will make a conditional order for exit and discharge.
Although in most cases administrators appointed by the court will be able to exit the administration by filing a notice to a court, they will always need to apply to the court for an order to discharge them of liability.
It could therefore save costs if administrators could obtain a conditional order, but is this a real option for a court-appointed administrator, and if so, when?
Overview of Re Central
In Re Central, the administrators were appointed by the court. It was proposed that the company should exit administration via a Company Voluntary Arrangement (CVA), as such the administrators needed a court order to exit the administration as well as an order to discharge them of liability.
The CVA was proposed by the administrators and subsequently approved, and the administrators were appointed as supervisors of the CVA. The only remaining tasks in the administration were to make certain statutory filings. The administration would only remain in place to provide for a moratorium and to disable the powers of the directors.
The administrators subsequently applied to the court for an order to extend the period of the administration and, at the same time, invited the court to make an order under paragraph 79 of Schedule B1 to terminate the administration conditional upon successful implementation of the CVA. They also sought an order that they be discharged from liability under paragraph 98, 28 days after the administration terminated.
Why did the administrators apply for conditional discharge?
If the court was willing to make a conditional order, it would avoid a further court application to obtain discharge at a later point. If the conditions were not met, then the administrators would end the administration some other way.
The administrators' reasoning seemed fair – to avoid an additional court application if the CVA was successfully enacted and save costs – and they sought to rely on the case of Lehman Brothers International (Europe) (in administration)  in support of their position that the court had jurisdiction to grant such an order.
Lehman – an example of an application for conditional discharge
The administrators in Lehman Brothers sought a conditional order that they be discharged of liability 28 days after they sent a progress report to creditors.
All that was left to do in that administration was agree on the tax position with HMRC, pay the tax outstanding, and then distribute the assets to the only remaining creditor. It was anticipated the company would exit administration and be dissolved without any further order needed.
Though Hildyard J rejected the application, he noted that there was a possibility it would have been accepted in different circumstances. The reason for the judge being over cautious (as he himself admitted) was to address any unexpected delays dealing with HMRC. He thought it would be best to deal with the application on paper at a later date.
The administrators in Re Central argued the Lehman case indicated the court had jurisdiction to make such a conditional order, and relied on the fact that the position in Re Central was different because the completion of the CVA meant the administrators had no further steps to take in their role apart from statutory filings.
Reasons for refusal
The judge in Re Central agreed that it did have jurisdiction to make the order but refused to do so for several reasons.
The CVA in Re Central was expected to make a distribution within six months of its approval but there was a possibility that it might be in place for a longer period because of potential disputes over the adjudication of creditor claims – and there was evidence that a challenge was possible. This would mean that the administrators would remain in office for a much longer period than six months. The court said that it was not appropriate to make a prospective order for potentially a long period of time.
Furthermore, exit and discharge were dependent on the successful completion of the CVA. If creditors disputed claims this could become tied up with questions about whether the administrators had been effectively discharged, and potentially result in another application to court – this was undesirable.
In addition, the court was concerned – although recognizing this was a remote possibility – that creditors could use a dispute against the supervisors as a ‘bargaining chip in negotiations.' Although the risk was remote, the fact that the risk was ‘conceivable’ was enough of a reason for the judge not to grant a conditional order.
Will the court ever grant a conditional discharge order?
Although it is clear that the court has jurisdiction to make a conditional order, and there is merit in such an order – it would save costs and court time – it is difficult to envisage many situations where the court will exercise that power.
Where there are lots of “moving parts” and the potential for things to change, it will certainly be difficult to convince a court to grant such an order. It is also unlikely to grant a conditional order if there will be a significant time period between the date of the order and the condition being met.
It seems that the court will likely need to be satisfied that there is no risk of something unexpected happening between the date of the conditional order and the date of exit/discharge – is it ever possible to rule out that risk?
The court in both Lehman and Re Central was incredibly hesitant to grant an order for conditional exit and discharge and did not do so.
If, as appears to be the case, it will be difficult to convince the court to make such an order, this is likely to make it counterproductive to apply for such an order in the first place because any costs saving will be lost.
Not only will the administrators have incurred the cost of the first application, but they may well find that they have to make another application in the future if the conditional order is refused. In Lehman, this was in part addressed by the court allowing the future application to be dealt with on paper, but the court did not agree that the administrators of Re Central could do that.
The Re Central judgment will likely make court-appointed administrators think twice about applying for a conditional exit and/or discharge of liabilities.