A recent Court of Session decision ruled in favour of a petitioning creditor, allowing a winding up petition for a company registered in Jersey, to be granted. Not only does this clarify a complex jurisdictional issue but provides hope to creditors who have contracting parties registered out with Scotland but whose business and assets have a strong link to this jurisdiction.

Background

Kingston Park House Limited submitted an order under Section 221 of the Insolvency Act 1986 to wind-up Granton Commercial Industrial Properties Limited in the Scottish Courts. As the respondent was a Jersey company was not registered in the UK, it was defined as an unregistered company under section 220 of the Insolvency Act 1986.

The petition was challenged by the respondent on two grounds. The first; that there existed no jurisdictional ground for raising the action in Scotland as the respondent was domiciled in Jersey, and secondly; the respondent’s inability to pay the debt was partly due to the actions of the petitioner.

The basis of the debt was founded by the purchase of plots within the Granton Harbour estate by the respondent, through funding from the petitioner. The loan equaled £4 million and repayment became due on 12 March 2020. Despite the petitioner agreeing to multiple repayment extensions, the respondent ultimately remained unable to pay. The petitioner therefore proceeded with a petition to wind up the company on the basis that it could not pay its debt as they fell due (the test for insolvency).

Jurisdiction

The general rule that courts should not have jurisdiction in matters which might ordinarily fall within the competence of the other courts, is subject to the following three considerations Stocznia SA -v- Latreefers Inc (No 2) 2001 BCC 174 (applied in HSBC Bank plc 2010 SLT 281):

• There must exist a sufficient connection with Scotland which may, but does not necessarily have to, consist of assets within the jurisdiction.
• There must be a reasonable possibility, if a winding- up order is made, of benefit to those applying for the winding – up order.
• One or more persons interested in the distribution of assets of the company must be persons over whom the court can exercise a jurisdiction.

Lord Clark considered each of the considerations in his judgement. When establishing whether a sufficient connection with Scotland was present, it was agreed that the respondents’ principal place of business was in Scotland despite the company’s registered office being in Jersey. All relevant heritable property and assets were also based in Scotland and no business existed outside of Scotland the company having been incorporated to manage properties in the Granton Harbour area. Lord Clark concluded that the presence of business and relevant assets in Scotland satisfied the existence of a sufficient connection, meeting the first core requirement.

Considering the second core requirement, Lord Clark commented that winding up a company is not the last resort for a secured creditor. A petitioner must demonstrate that there is a reasonable possibility of benefit to them by winding- up the company. In addition, Lord Clark explained that there is no requirement to show that winding up would offer a greater benefit to the petitioner than the enforcement of the standard securities it held over the respondent’s properties. Lord Clark identified there was a benefit in granting the order to the petitioner insofar as it would dispense with the need for enforcing the petition’s securities and entering in to possession of the properties. The liquidator would have a direct power of sale.

In satisfying the third core requirement, Lord Clark relied upon the petitioner’s wider remit to exercise its right to Scotland ‘in relation to Insolvency Law’ under section 426 (1) of the Insolvency Act 1986. Lord Clark also accepted that by the petitioner having standard securities over heritable property in Scotland, they have submitted to the exercise of a jurisdiction by the Scottish Courts. In applying both, Lord Clark was satisfied that the final requirement had also been met.

Merits

Turning to the merits of the case, Lord Clark accepted that there was a significant unpaid debt which had subsisted for a long time due by the respondent. He regarded there to be no material substance within any of the respondents claims to restrict the petitioners right to claim for repayment or jurisdiction and granted the petition.

Conclusion

Lord Clarks’ ruling provides some helpful clarification on scope of the Scottish Courts to grant winding up petitions for companies that are registered in a foreign jurisdictions provided a link to Scotland exists. It also provides a further example of the Court of Session taking a robust line on respondents seeking to answer petitions on the basis that debts are disputed on flimsy grounds.

If you are looking to recover debt in Scotland or have any questions about insolvency more generally, please get in touch with our experienced team who will be happy to help.