Insolvency: Court confirms overseas winding up approach

While the law of England is reasonably well developed, there is a dearth of authority in Scotland concerning the circumstances in which the Scottish courts may wind up an overseas company. This was the question that the First Division required to address in Kingston Park House v Granton Commercial Industrial Properties [2022] CSIH 59.

Background

The reclaimers were a company registered in Jersey which owed a substantial amount in loans to the petitioners. The petitioners had security over plots of land at Granton harbour, Edinburgh, which had been purchased for the purpose of development. The development did not take place and the loans defaulted. The petitioners sought to wind up the reclaimers. The Lord Ordinary granted the petition at first instance. The reclaimers appealed.

Although the reclaimers were registered in Jersey, from where their management and control was exercised, the plots at Granton were the sole asset owned by the company. They had an agent in Edinburgh, but no office or place of business there.

The applicable law

It was common ground that, because the reclaimers were not registered under the Companies Act 2006, they were an unregistered company for the purpose of the Insolvency Act 1986. This meant that the court had a degree of discretion in relation to the winding up of such a company.

The court considered the position in England & Wales in relation to the exercise of the court’s discretion and identified that there were “three core requirements”. Those were:

1. There must be sufficient connection with England, which may but does not necessarily have to consist of assets within the jurisdiction.
2. There must be a reasonable possibility of benefit to the party seeking the winding-up order if it is granted.
3. One or more persons interested in the distribution of assets of the company must be persons over whom the court can exercise jurisdiction.

While there was no binding authority in Scotland as to the application of the three core requirements, the court noted that Lord Hodge, as Lord Ordinary in HSBC, Petitioner 2010 SLT 281 had cited the requirements with approval. It also noted the desirability of applying the provisions of the 1986 Act consistently across the UK.

The court’s judgment 

The first question was whether the three core requirements were “hard-edged rules of law”, or factors to be considered in the exercise of the court’s discretion. The court held, following English authority, that they were the latter. 

The court then considered the three requirements in turn. 

It was admitted that the first requirement – a sufficient connection to Scotland – was satisfied. In this case the reclaimers’ only known assets were in Scotland, and Scottish liquidators were best placed to deal with them.

In relation to the second requirement, it was argued that this was not satisfied because the court required to weigh up the advantages and disadvantages of proceeding with a winding-up petition as opposed to other options for recovery, such as calling up securities. The court rejected this argument. It held that this requirement was “not a difficult test to satisfy”. The petitioners did not require to look to their securities. There was also clearly a benefit of having an independent, Scottish-based liquidator under the supervision and control of the court to take steps to realise the company’s assets.

It was further argued that the third requirement could not be satisfied as the petitioners were not based in Scotland and had no place of business here, and therefore were not subject to the jurisdiction of the Scottish courts. The court referred to s 426 of the 1986 Act, which provides that any order of a court in the UK in relation to an insolvency matter may be enforced in any other part of the UK as though it had been pronounced there. The court considered that this “direct effect” of insolvency law into the rest of the UK meant that the court did have the power to exercise jurisdiction over the petitioners. Moreover, any action taken by the petitioners in calling up their securities would require to be raised in the Scottish courts. Taken as a whole, this requirement was also satisfied.

Conclusion

It’s rare that a creditor attempts to wind up an overseas entity in Scotland. Therefore. it is beneficial to have clarity that the Scottish courts intend to adopt a similar line to the rest of the UK when approaching this question.