Mon 06 Feb 2023

Winding-Up an Overseas Company in Scotland: A Matter of Discretion

Winding-Up an Overseas Company in Scotland: A Matter of Discretion

When should a Scottish court order the winding-up of an overseas company? This was the question considered by the Inner House of the Court of Session in the recent decision in the case of Kingston Park House Limited v Granton Commercial Industrial Properties Limited [2022] CSOH 97; [2022] CSIH 59.

The case involved some rare questions about insolvency and the jurisdiction of Scottish courts of ‘unregistered’ overseas companies. The Petitioner, Kingston Park House Limited (“Kingston”), is a company based in England, and Respondent, Granton Commercial Industrial Properties Limited (“Granton”), is a company based in Jersey.

Granton borrowed various sums from Kingston in order to purchase areas of land at Granton Harbour in Edinburgh with a view to developing the land and selling it on for profit. Granton had granted a standard security over the property, and it also had an agent carrying out its business in Edinburgh. Repayment of sums due under the loan agreement, which had reached in excess of £7 million, was not made within the agreed timescales. As such, Kingston applied to wind-up Granton on the basis that Granton was unable to pay its debts as they fell due.

Granton argued that the Scottish Courts had no jurisdiction to issue a winding-up order, on the basis that Granton was a company based in Jersey, and Kingston was a company based in England.

The legal background

Section 221 of the Insolvency Act 1986 confers a power upon the Court to wind-up ‘unregistered companies’ – i.e. companies which are registered overseas but nevertheless have a place of business within the UK.

Whether the court decides to exercise jurisdiction to issue a winding-up order is, however, a matter of discretion for the court. The test which assists the court to determine whether it has the jurisdiction to wind-up an overseas company was incorporated into Scots Law by Lord Hodge in HSBC Bank plc 2010 SLT 281. This consists of three “core requirements”:

  1. There must be a sufficient connection with Scotland which may, but does not necessarily have to, consist of assets within the jurisdiction.
  2. 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.

The decision of the courts

Granton argued that these three core requirements had not been fulfilled. However, Lord Clark granted the winding-up order on 3 November 2022, holding that all of these three requirements had been satisfied. In his decision, he explained that:

  1. Granton had a ‘sufficient connection’ with Scotland. Its principal place of business was in Scotland. Its only substantial assets were in Scotland and its agents had an office at Granton where these assets were managed;
  2. The second requirement was fulfilled because it was objectively true that winding-up proceedings were of benefit to the Kingston. Granton had attempted to argue that winding-up proceedings should be a ‘last resort’ action, and that the Petitioner needed to demonstrate that winding-up procedures would be of greater benefit to them than other remedies available to them, such as the enforcement of a standard security. Lord Clark rejected this interpretation and noted also that winding-up procedures have other benefits beyond economic considerations of debt recovery; and
  3. The third core requirement was also met for two reasons. Firstly, Granton had made themselves subject to the jurisdiction of the Scottish Courts as they had granted standard securities over the properties, meaning that they could bring or defend proceedings in Scotland relating to these. Secondly, section 426(1) of the 1986 Act allows for an order made by the Scottish Courts in relation to insolvency law to be enforced in England as if it were made by a court within England. Kingston, being based in England, were therefore subject to the jurisdiction of the Scottish Courts in relation to insolvency law.

Granton appealed the matter to the Inner House of the Court of Session on the basis that the Lord Ordinary had failed to exercise his discretion correctly in the Outer House decision in respect of the three core requirements. The First Division of the Inner House refused the appeal, noting principally that the three core requirements were not constraints on the discretionary power of the Court. The Court stated that the “plain reading” of the powers conferred by statute which allow the court to wind-up unregistered companies would suggest that the court has broad discretion. As such, there was no basis for interfering with it. The so-called three “core requirements” are not “hard-edged rules of law”, but rather, “factors that may be relevant to the exercise of the court’s discretion depending on the particular facts of the case.” In any event, the Inner House also noted its agreement with the Lord Ordinary’s decision regarding the jurisdiction of the Court.

Significance of Kingston for insolvency law

This case will undoubtedly be used as authority for future actions seeking to wind up unregistered companies in the Scottish Courts. As the Inner House made clear, this decision has clarified that the three core requirements incorporated into Scots Law by HSBC plc are not a hard-edged test but, rather, guidelines to assist the Court in the exercise of its discretion. The reasoning behind such a decision ultimately remains circumstantial. The Court’s ruling that Granton had submitted to the exclusive jurisdiction of the Scottish courts by virtue of their ‘subordinate real right’ over property in Scotland may also have implications in a variety of jurisdictional disputes outside of the realm of insolvency law, where jurisdiction can be established not only from the real right of ownership, but from other ‘subordinate’ real rights.

So, to turn back to the initial question: when should a Scottish court order the winding-up of an overseas company? The answer is: it really depends.

This article was co-written by Jamie McGowan, Trainee Solicitor. 

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