Scottish Court of Session Decisions

Petitioner: Sellar QC; Shepherd & Wedderburn LLP

29 September 2009

[1] This is an application to wind up Kirkbride Investments Limited ("Kirkbride") and for the appointment of joint provisional liquidators. It is one of eleven applications by HSBC Bank PLC to wind up companies which are registered overseas. Ten of the companies, including Kirkbride, are registered in Gibraltar; one is registered in the British Virgin Islands. The companies are part of the York Group of companies as they had common ownership and also had a common sole director, namely F G Management Limited ("FGM"), a company incorporated in the Isle of Man. They also have a common company secretary, namely Steadfast Corporate Services Limited ("Steadfast"), a company incorporated and based in Gibraltar. The petitioners aver that the companies were incorporated overseas simply in order to obtain tax advantages in the United Kingdom. The companies were engaged in property development in Scotland with the assistance of secured lending which the petitioners provided.

[2] Each company in the York Group is a single-venture company which has been engaged in the development of a building site either as a sole owner of the site (in the case of four companies) or as a joint owner of a site (in the case of seven companies). Each company has a substantial connection with Scotland through its land ownership. In each of the seven cases where the respondent is a joint owner of a site, the other joint-owning company has been placed in administration. In the case of Kirkbride, the other joint owner, Medina Sun Limited, went into administration on 24 November 2008. The petitioners have demanded repayment of the sums which each of the companies is due to pay them in accordance with the terms on which petitioners financed each company. As a result no-one is carrying out any development on the any of the sites, each of which remains only partly built.

[3] The issues which arise in this application are essentially the same as those in the other ten applications. In support of the applications, Mr Sellar QC for the petitioners referred me to the Insolvency Act 1986 ("the 1986 Act") and to the following cases: Stocznia Gdanska SA v Latreefers Inc.( No 2) [2001] 2 BCLC 116, Banco Nacional de Cuba v Cosmos Trading Corporation [2000] BCLC 813 (CA), Marshall, Petr (1895) 22R 697, Inland Revenue Commissioners v Highland Engineering Limited 1975 SLT 203 and Deputy Commissioner of Taxation v Status Constructions Pty Limited (1987) 12 ACLR 689. He also referred to Anton, "Private International Law" (2^nd ed.) pp.721-722, Macpherson's "Law of Company Liquidation" (1^st England and Wales edition) pp. 358-360, and French, "Applications To Wind Up Companies" (2^nd ed.) p.867.

Jurisdiction

[4] The first issue is whether this court has jurisdiction. The petitioners aver that they reasonably believe that Kirkbride's centre of main interests is in Gibraltar. They aver that Kirkbride does not have a centre of main interests or an establishment in any member state of the European Union in terms of the EU Council Regulation on Insolvency Proceedings (1346/2000/EC).

[5] The petitioners have not been able to obtain the Memorandum or Articles of Association of Kirkbride and such documents are not available in the Registry of Companies in Gibraltar. No audited accounts have been prepared and the petitioners are not aware that Kirkbride possesses any material assets other than its interest in the development site at 12 Hope Terrace, Edinburgh, over which the petitioners hold a security.

[6] The petitioners seek an order for the winding up of Kirkbride under Part V of the Insolvency Act 1986 ("the 1986 Act"). They submit that Kirkbride is an "unregistered company" for the purposes of Part V of the 1986 Act and that section 221 of that Act gives this court jurisdiction to wind it up.

[7] The relevant statutory provisions are in Part V of the 1986 Act. Section 220(1) of the 1986 Act provides:

"For the purposes of this Part, the expression "unregistered company" includes any association and any company, with the following exceptions -

.....

(b) a company registered in any part of the United Kingdom under the Joint Stock Companies Acts or under the legislation (past or present) relating to companies in Great Britain."

[8] Section 221 of the 1986 Act so far as relevant provides:

"(1) Subject to the provisions of this Part, any unregistered company may be wound up under this Act; and all the provisions of this Act and the Companies Act about winding up apply to any unregistered company with the exceptions and additions mentioned in the following subsections.

.....

(3) For the purpose of determining a court's winding up jurisdiction, an unregistered company is deemed -

(a) to be registered in England and Wales or Scotland, according as its principal place of business is situated in England and Wales or Scotland, or

(b) if it has a principal place of business in both countries, to be registered in both countries;

and the principal place of business situated in that part of Great Britain in which proceedings are being instituted is, for all the purposes of the winding up, deemed to be the registered office of the company."

[9] One of the circumstances in which the court may order the winding up of an unregistered company is if the company is unable to pay its debts: section 221(5) of the 1986 Act. An unregistered company is deemed for the purposes of section 221 to be unable to pay its debts if, inter alia, it is proved to the satisfaction of the court that it is unable to pay its debts as they fall due: section 224(1) of the 1986 Act.

[10] I am satisfied that Kirkbride is an unregistered company and, as its only business is to develop property in Scotland, its principal place of business is in Scotland. This court has jurisdiction to make a winding up order under Part V of the 1986 Act.

Exercise of discretion

[11] The second issue is how the court should exercise its discretion. There is no recent Scots case law on this issue but I am satisfied that the approach of the English courts is appropriate and I recall that our courts have adopted that approach in applications which have not resulted in written opinions. In similar circumstances Lord Grieve in Inland Revenue Commissioners v Highland Engineering Limited 1975 SLT 203 relied on English case law in his interpretation of the provisions of the Companies Act 1948 in relation to the winding up of unregistered companies and observed that it was desirable that the courts in each jurisdiction should interpret a United Kingdom statute, such as the Companies Act, in the same way. In Marshall, Petitioner (1895) 22 R 697 the First Division used English authority to inform their interpretation of section 199 of the Companies Act 1862.

[12] In the interests of comity and having regard to practicality, the courts must exercise restraint before granting orders for the winding up of foreign companies. In Banco Nacional de Cuba v Cosmos Trading Corp [2000] BCLC 813 (CA) Sir Richard Scott V-C stated (at p.819g-h):

"In my opinion, the courts of this country should hesitate very long before subjecting foreign companies with no assets here to the winding-up procedures of this country. Of course, if a foreign company does have assets in this country, the assets may need to be distributed among creditors, and a winding-up order here, sometimes ancillary to a principal winding up order in the place of incorporation of the foreign company, may be necessary. But a winding-up order here, while the foreign company continues to trade in its country of incorporation and elsewhere in the world, is in my view thoroughly undesirable. I would not say a winding-up order in those circumstances could never be right, but I do say that exceptional circumstances and exceptional justification would be necessary."

In my view, the Scottish courts should adopt the same approach in such circumstances. But those are not the circumstances of this case, in which Kirkbride's only business activity appears to have been in Scotland, where its only substantial business asset is located.

[13] There are three core requirements for the exercise of the power to make a winding-up order in relation to a foreign company. First, there must be a sufficient connection with Scotland which may, but does not necessarily have to, consist of assets within the jurisdiction. Secondly, there must be a reasonable possibility of benefit to the petitioners if the court were to make the winding up order. Thirdly, one or more of the persons interested in the distribution of company's assets must be persons over whom the court can exercise a jurisdiction. See Stocznia Gdanska v Latreefers (No 2) [2001] 2 BCLC 116, Lloyd J at p.120a-c and Morritt LJ at pp.136-137; Re Real Estate Development Co [1991] BCLC 210, Knox J at p.217.

[14] Those core requirements are met in this case. First, Kirkbride's principal asset is the development site in Scotland. Secondly, the petitioners, who have a security over the development site, are likely to benefit from the grant of a winding-up order if the provisional liquidators and later the liquidators are able to complete the developments and thereby obtain a better price for Kirkbride's assets than otherwise could be obtained. Thirdly, the petitioners have offices within this jurisdiction and this court can exercise a jurisdiction over them.

[15] I am satisfied that the court should exercise its jurisdiction in relation to the application for a winding-up order by making an order for service and for the lodging of answers. Kirkbride is a single - venture company and its principal asset is the site at 12 Hope Terrace, Edinburgh. It depended on finance from the petitioners to develop that site. On 23 September 2009 the petitioners sent a written demand in terms of their facility letter and their general terms and conditions demanding the immediate repayment of £2,000,000 of principal and £81,666.71 of accrued interest and intimating that they might seek to have the company wound up. The petitioners sent the demand letter by first class mail and by courier to Kirkbride's registered office. They also sent it on the same day by first class post and by international courier to FGM and by fax to Steadfast. An employee of Steadfast acknowledged its receipt. No-one on behalf of Kirkbride has challenged the demand or made any proposal to repay the loan. There is a strong prima facie case that Kirkbride is unable to pay its debts in terms of section 221(5) and 224(1) of the 1986 Act.

The appointment of provisional liquidators and their powers

[16] The petitioners also seek the appointment of provisional liquidators and apply for them to be given authority to exercise the powers conferred by paragraphs 4 and 5 of Schedule 4 to the 1986 Act without further intervention of the court.

[17] Section 229 of the 1986 Act provides:

"(1) The provisions of this Part with respect to unregistered companies are in addition to and not in restriction of any provisions in Part IV with respect to winding up companies by the court; and the court or liquidator may exercise any powers or do any act in the case of unregistered companies which might be exercised or done by it or him in winding up companies formed and registered under the Companies Act.

(2) However, an unregistered company is not, except in the event of its being wound up, deemed to be a company under the Companies Act, and then only to the extent provided by this Part of this Act."

[18] The petitioners aver that Smart Homes Services Limited ("Smart") had acted as the development contractor for the York companies, including Kirkbride, and that a winding-up order was made in relation to Smart on 23 June 2009. They aver that neither FGM nor Steadfast nor any other person has acted to take management decisions for any of the York companies. FGM have resigned as director of all of the York companies. While the administrators of Medina Sun Limited have secured the development site, the petitioners are not aware of any insurance of the site. It is necessary to take steps to preserve the value of Kirkbride's assets pending the making of a winding-up order. The petitioners seek the appointment of provisional liquidators with powers to carry on the business of Kirkbride. On the making of a winding-up order the petitioners wish the liquidators to have the opportunity to complete the development if that would maximise the benefit to Kirkbride's creditors. Thus, at this stage, they seek the court to give the provisional liquidators power to carry on Kirkbride's business to the extent that they consider this to be in the interests of the creditors. This may involve borrowing the needed funds and making contracts with construction companies or other contractors to that end.

[19] I am satisfied that it is appropriate to make the orders which the petitioners seek.

[20] The petitioners aver that they had instructed the proposed appointees, who are members of Ernst & Young LLP, in June 2009 to review the York companies. They submitted a report to the petitioners in August 2009. I am satisfied that that involvement does not preclude their appointment as provisional liquidators and, if a winding up order is later made, as interim liquidators or liquidators of Kirkbride. It is well established that the persons, whom the court appoints as provisional liquidators or interim liquidators, must be independent and impartial and must be seen to be impartial. They must act in the interests of all creditors. But, in my opinion, the proposed appointees' involvement in advising the petitioners on the financial position of the York companies and on their possible insolvency does not of itself disqualify them on the ground of any perceived bias. Nor do I consider that that involvement gives rise to a real and substantial possibility of a conflict of interest.

Conclusion

[21] I am satisfied that it is appropriate to grant the orders which the petitioners seek. As Steadfast may no longer be acting as company secretary, the petitioners should intimate to FGM that the petition will be served on Kirkbride and the time within which answers are required. In the meantime I appoint Mr Dempster and Ms Taylor as joint provisional liquidators with the powers for which the petitioners have applied.