12 January 2015

Discharging an Administration Order

Carey Olsen's restructuring and insolvency team has achieved a significant success in securing an order for the discharge of an administration order made pursuant to the Companies (Guernsey) Law, 2008, as amended (the "Companies Law"), on the basis that the company, Mitco Retail Six Limited ("MR6"), could survive as a "going concern". Advocate David Jones and associate Luke Sayer acted for the administrators, Ernst & Young LLP.

The Facts

On 19 June 2014, MR6 was placed into administration on the basis it was unable to pay its debts as they fell due. MR6's creditors consisted of: (a) a multimillion pound historical secured loan from Nationwide Building Society (subsequently assigned to a third party); (b) shareholder debt; and (c) other unsecured creditors. The secured lending was enforced by the appointment of administrators to MR6 on the basis that administration would facilitate either the survival of MR6 as a going concern or a better realisation of its portfolio of German commercial real estate assets than a fire sale in liquidation.

Having investigated the value of the assets of MR6 which had struggled to generate offers at an acceptable level in a sales process, the joint administrators received an offer of refinancing from the existing shareholders of MR6 at a level sufficient to discharge the historic secured debt, unsecured creditors and the fees and expenses of the administration. The complexity arose out of the unusual nature of the transaction and the need to satisfy the court that MR6 could continue as a "going concern" as a result of the refinancing.

Carey Olsen and CMS Cameron McKenna (as English counsel to the joint administrators) structured a transaction whereby all of the requisite documentation to release existing security and advance the new sums sufficient to discharge the debts were executed and held in escrow together with the refinancing cash pending an application to the Royal Court for the discharge of the order and the return of MR6 to its former board and shareholders.

The Judgment

There is no statutory definition of what constitutes a going concern in the context of discharging an administration order in Guernsey. Advocate Jones was able to persuade the Royal Court that, as a minimum, a company must be able to satisfy the solvency test laid down in section 527 of the Companies Law. That is a two part cumulative test requiring a company to be both 'cash flow' (i.e. able to pay its debts as they fall due) and 'balance sheet' (i.e. its assets exceed its liabilities) solvent.

Detailed evidence pertaining to the financials of MR6 was presented to the Royal Court on this issue, including significant evidence concerning the structuring of the new lending to limit recourse against the property assets such that the balance sheet test could be met by MR6. During the administration, MR6 had continued to generate rental income from its commercial properties. This income had been sufficient to discharge the day-to-day costs as they arose. Accordingly, MR6 was able to satisfy the court that the cash flow solvency test was met.

The Royal Court was ultimately content that the structuring of the transaction documentation dictated that MR6 could continue as a going concern.

On making the order, the joint administrators vacated office and the management and control of MR6 was returned to its current board for it to continue to trade. 

Discussion

The outcome is unusual and possibly a first for Guernsey in terms of a successful refinance being secured of a company in administration so as to rescue it as a going concern. Carey Olsen's ability to assist the joint administrators with all aspects of the transactional process, including preparing and presenting the application to the Royal Court, was central to the success of the deal. The result also provides a welcome reminder of the flexibility of the Guernsey administration regime and the increasing sophistication and understanding of the Royal Court in complex insolvency matters.

Guernsey's corporate insolvency regime is currently under review. That review encompasses proposed changes to the administration regime to expand its scope but, as has been demonstrated previously (HMV and Leadenhall), the existing regime can be used to augment the work of office holders and to implement a rescue strategy.

Advocate Jones commented: "It is testament to the skill and experience of the joint administrators, their teams and the other advisors that they have achieved a rescue of this company as a going concern. This is a further example of Guernsey's corporate insolvency regime being successfully utilised through the Royal Court in a complex, multi-jurisdictional scenario. The planned improvements to the existing regime will only serve to strengthen Guernsey's reputation as a creditable jurisdiction for this work."

 

Please note that this briefing is intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.  

© Carey Olsen 2017