Administrators’ Discharge

2nd September 2020 Restructuring & Insolvency

The case of Re Lehman Brothers Europe Ltd (In Administration) [2020] EWHC 1369 (Ch) in May 2020 highlighted the importance of ensuring that creditors or the creditors committee approve the discharge of Administrators’ liability pursuant to paragraph 98 of Schedule B1 to the Insolvency Act 1986. 

LBEL had been placed into liquidation without the matter of when the Joint Administrators’ discharge would take effect having been put to the creditors’ committee prior to the conclusion of the Administration.  Creditors having been repaid in full, the creditors’ committee was automatically disbanded in accordance with rule 17.11(e) of the Insolvency Rules 2016: “a person’s membership of a committee is automatically terminated if that person ceases to be a creditor or is found never to have been a creditor”.

Paragraph 98(2)(b) requires the discharge in question to take effect (where an administrator is appointed under either paragraph 14 or 22 and no paragraph 52(1)(b) statement has been made) “at a time appointed by resolution of the creditors’ committee or, if there is no committee, by decision of the creditors”.

In LBEL, the Administrators’ Proposals had referenced the issue of discharge but they did not propose for discharge to occur on any particular date but “at a time determined by the creditors committee or, if no creditors committee appointed, by the general body of creditors”. The creditors approved all the proposals but the time at which discharge would occur was not fixed. The subsequent automatic dissolution of the creditors’ committee left the Joint Administrators without a decision on the issue of the date of their discharge.

There being no creditors’ committee or creditors, the only way for the Joint Administrators to obtain their discharge was by order of the court under paragraph 98(2)(c).

The Court first had to decide whether or not the former Joint Administrators (LBEL now being in liquidation) had standing to issue such an application. Mr Justice Hildyard had no difficulty (at paragraph 22 of the judgment) in concluding that they did, the Joint Administrators evidently having a sufficient interest in the matter, their period in office having concluded and discharge under paragraph 98 taking effect after such time. 

Having concluded that there was no good reason not to grant the discharge (there being no creditors in opposition and the Joint Administrators having confirmed they were not aware of any claims against them or of any facts which would give rise to such claims), the timing of the discharge was then considered. In the case of Hellas Telecommunications (Luxembourg) II SCA (In Administration) [2013] 1 BCLC 426, Mr Justice Sales had followed what he was informed was the usual practice of ordering that discharge take effect 28 days after the filing of the final report to creditors and this remains the usual approach by the courts, albeit “forthwith orders” can be granted if the application itself is heard more than 28 days after the appointment has ceased to take effect.

Other considerations for Administrators

  1. Obtaining discharge under paragraph 98 does not preclude a creditor from pursuing misfeasance claims against Administrators: at paragraph 96 of the Hellas judgment, Sales J confirmed that “In so far as there is a good arguable case against him of improper conduct or misfeasance, that can be proceeded with after the discharge is given, in accordance with paragraph 98 of Schedule B1 read with paragraph 75."
  2. Administrators should give serious consideration to when during the administration they seek to obtain discharge. The courts and regulatory bodies including the ICAEW have cast serious doubts on the efficacy of discharge being obtained as part of the approval of the Administrators’ Proposals. HHJ Cooke was particularly unimpressed in Re Parmeko Holdings Ltd [2014] BCC 159 (at paragraph 20):

    “I need not, I think, go through each of the following proposals. I would mention the discharge from liability. It seems to me that there must be some doubt as to the appropriateness of inviting the creditors at the commencement of the administration to agree a date upon which the administrators should be discharged from liability. As and when the administrators cease to hold office, their discharge is provided for by para.98 . Mr Weaver makes the point that Sch.B1 para.98(2) provides that the creditors may resolve to fix the time at which the discharge takes effect, but it seems to me that the creditors can only sensibly consider this question when they know what the effect will be, which in turn means that they should be in a position to know what has gone on in the administration and form a view as to what if any potential claims might be affected by the release. They plainly cannot in most cases do this at the first meeting of creditors.”
  3. Administrators should remember that, where Administrators’ Proposals (or any other proposals) are not approved, including in circumstances in which no approval is obtained because no creditor votes, the matter of discharge must not be left behind prior to liquidating or dissolving the company. We have recently assisted a former Administrator of a company in this situation to obtain a discharge order following the company having been dissolved.
  4. Finally, an order under paragraph 98(2)(c) of Schedule B1 may be made in relation to a former administrator while the administration remains afoot. A former administrator of Lehman Brothers International (Europe) (in administration) was granted discharge on an application by the company's then-current Joint Administrators.

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Alejandro Worthington is a Partner located in Londonin our Restructuring & Insolvency department

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