Jersey company wound up in Scotland under section 221 of the Insolvency Act 1986
We have emerged from the COVID-19 pandemic amidst war, political instability, strikes and double-digit inflation rates that haven’t been seen since the early 1980s. With interest rates likely to continue to rise during the first half of 2023 and pay increases falling short of inflation, consumer confidence remains low. Companies’ margins are being squeezed by rising interest rates and when combined with increased debt burdens, supply chain difficulties and labour shortages it is no surprise that the number of insolvencies across the UK is increasing.
For the past two years insolvencies have been at a record low as government schemes supported businesses through the pandemic and pushed pause on enforcement action. However, the landscape is changing and while forecasts in respect of the severity of the predicted recession seem to be tapering back, insolvency figures published on 17 January 20231 report that in December 2022 there were 114 company insolvencies in Scotland, up 23% when compared with December 2021. The position is similar in England and Wales where insolvency figures in December 2022 were 32% higher than in December 2021.
One of the sectors hardest hit by rising interest rates, soaring material costs and lack of skilled labour is the construction sector. A recent case2 heard by the Scottish Courts at the end of 2022 concerned the winding up of Granton Commercial Industrial Properties Limited (GCIPL), a Jersey incorporated property development company. With funds made available from Kingston Park House Ltd (Kingston), GCIPL acquired plots of land at Granton Harbour Estate in Edinburgh for development. GCIPL owed Kingston in excess of GBP7 million when the project foundered. Kingston (an English registered company) petitioned to wind-up Granton in the Scottish courts.
The question presented by this case was, could an English creditor petition for the liquidation of a Jersey company (being an unregistered company for the purpose of section 221 of the Insolvency Act 1986 (the Act)) in the Scottish Courts?
GCIPL’s only assets were the property in Edinburgh and a small bank balance. Although GCIPL had one agent based in Edinburgh, it was managed and controlled from Jersey. There was no evidence of any operations conducted in any other jurisdiction.
When considering Kingston’s petition, the Outer House of the Court of Session applied the well-established three stage test3 for winding up a foreign company under section 221 of the Act.
1. Is there a sufficient connection with the jurisdiction?
This was satisfied as GCIPL’s principal asset was the development sites at Granton Harbour, Edinburgh.
2. Was there a reasonable possibility of benefit to Kingston, the petitioner, if the winding-up order is made?
This was satisfied as there were advantages to having an independent insolvency practitioner (the liquidator) being appointed to GCIPL and taking steps to sell the property rather than Kingston having to do so via enforcement of the standard securities.
3. Was there one or more persons interested in the distribution of the assets of GCIPL over whom the court could exercise jurisdiction?
This would occur where the person is subject to the jurisdiction or has submitted to it. The fact that Kingston brought the petition in the Scottish Courts was not in itself sufficient. To satisfy this test, Kingston relied upon the standard securities (governed by Scots law) which gave Kingston a subordinate real right in the Edinburgh property, and the application of section 426(1) of the Act which gives the Court the authority to exercise its jurisdiction over Kingston in relation to insolvency law.
Section 426(1) of the Act states, “An order made by a court in any part of the United Kingdom in the exercise of jurisdiction in relation to insolvency law shall be enforced in any other part of the United Kingdom as if it were made by a court exercising the corresponding jurisdiction in that other part.”
The Court found that it could exercise jurisdiction over Kingston and granted the order.
GCIPL appealed to the Inner House, which upheld the lower Court’s decision. The Inner House confirmed the Outer Court’s view that the three-stage test went to the discretion of the court not its jurisdiction. The three-stage test was not a “hard edged” rule of law, rather it is a guide that may assist the Court in exercising its discretion depending on the facts of each case.
In particular, the Inner House noted that the requirement for the Court to have jurisdiction over the interested parties was “clearly satisfied” due to the effect of section 426(1) of the Act. An order made by the Scottish court in the exercise of its jurisdiction in relation to insolvency law must be enforced in England as if it were made by a court exercising its corresponding jurisdiction there. Accordingly, Kingston (a company incorporated in England) is subject to the jurisdiction of the Scottish courts pursuant to this provision of the Act. This led the court to conclude that “there was no jurisdiction stronger than Scotland in relation to the winding up of the reclaimers.”
Given the number of “off-shore propcos” holding Scottish assets and the current economic headwinds, it is worth keeping this judgment in mind.
If you would like to discuss this judgment or any other restructuring matter please contact:
1 Monthly Insolvency Statistics, December 2022 - GOV.UK (www.gov.uk)
2 Kingston Park House Ltd v Granton Commercial Industrial Properties Ltd  CSIH 59, 2022
3 In re Drax Holdings Ltd  1 WLR 1049