Court of Session refuses first orders in disputed winding-up petition

In a recent decision of the Outer House of the Court of Session, Lord Lake refused to grant first orders in a petition to wind up Ayres Wynd Developments Limited. The case acts as an important reminder on the use of caveats, the treatment of disputed debts in winding-up proceedings and the procedural discretion available to the court.

Background and preliminary issues 

The petition, brought by Nicholas Parkin, a director and shareholder of the company, was opposed and the hearing initially focused on whether certain respondents had standing to address the court. The judgement doesn’t narrate who the respondents are, however it appears that the first respondent was the company with the identities of the third and fourth respondents not known. 

The company had caveats lodged with the court and it wasn’t disputed that the effect of the caveat is that the caveator - the company – can be heard at the hearing. It was argued however, that because the company is in voluntary liquidation, the directors no longer have the power to instruct legal advisers on its behalf, section 103 of The Insolvency Act 1986 section 103 stating that all powers of the directors of a company cease on appointment of a liquidator. It was argued by the petitioners’ legal agents that the remaining respondents hadn’t lodged caveats and they weren’t able to address the court. 

Although the company was purportedly in voluntary liquidation following a notice under paragraph 83(3) of Schedule B1 to the Insolvency Act 1986, the validity of the administrator’s appointment had been contested for some time without resolution - and thus the validity of the liquidation itself was also in doubt.  

Lord Lake noted that he had been advised that one of the reasons for the petition being sought was to provide clarity on the company’s status. He declined to assume the company was in liquidation, as in his words, that ‘would, in effect, determine the outcome. That is not appropriate’.   

The caveat entitled the company to be heard, and this made it necessary to hold a hearing. The third and fourth respondents were aware of that hearing and had instructed counsel to attend. Lord Lake states that as both the petition procedure and the hearing are public, any person in attendance or represented at the hearing who has an interest has a right to be heard. As a result, the third and fourth respondent’s legal agents were able to address the hearing. 

Discretion to refuse first orders 

The petitioner argued that Rule 14.5 of the Court of Session Rules mandates the granting of first orders upon presentation of a petition. However, Lord Lake clarified that this must be read in conjunction with Rule 5.1(d), which allows caveats to be lodged against such orders. The court therefore retains discretion to refuse first orders where appropriate. 

The test for granting first orders 

Drawing on authorities including Foxhall & Gyle Nurseries Ltd and PEC Barr (Holdings) Ltd v Munro Holdings UK Ltd, Lord Lake affirmed that first orders should be granted unless it’s inevitable that the petition will fail. In this case, the petition was based on the company’s alleged inability to pay its debts, and the existence of the debt was central to the petitioner’s claim. 

Substantial dispute over the debt 

The court heard that the debt was substantially disputed. The petitioner claimed over £1.3 million was owed to him by the company and submitted bank statements and a spreadsheet as evidence. However, these lacked explanatory detail and were unsupported by affidavit. In contrast, the respondents provided an affidavit from a company director asserting that the debt had been repaid, including payments to entities in which the petitioner held substantial interests. 

A dispute in relation to a debt won’t be “substantial” if it has no real prospect of success. A petition won’t be struck out just because the company alleges the debt is disputed but the court won’t allow a winding up petition to be used for the purpose of deciding a substantial dispute raised on bona fide grounds.  

Drawing on the case law, Lord Lake confirmed that a winding-up petition isn’t the appropriate forum to resolve such disputes. 

Lord Lake concluded that the dispute was genuine and substantial, echoing the approach taken by Lord Hodge in Mac Plant Services v Contract Lifting Services and by Judge Curl KC in the English case IPS Law LLP v Safe Harbour Equity Distressed Debt Fund LP.  

Conclusion 

The petition was ultimately refused. Lord Lake held that the existence of the debt was a critical element of the petition and that the dispute surrounding it rendered the petition unsustainable. He also noted that the petitioner could have sought winding up on just and equitable grounds but had chosen not to do so, the outcome of which might have been different. 

The judgement is a helpful reminder that the use of caveats in the courts can ensure that key parties in an action can obtain notice of actions against them and the opportunities that exist to then participate in a hearing. It also serves as a reminder that the public nature of certain court proceedings can also allow other parties with an interest to be heard, irrespective of whether they have caveats lodged or not. 

This decision reinforces the principle that winding-up petitions shouldn’t be used to litigate disputed debts and highlights the court’s discretion in managing such proceedings.  

Although not discussed in detail in the judgement, it’s important that the court recognised that seeking a winding-up order wasn’t an appropriate way to resolve whether a prior office-holders appointment was valid or not. 

Those involved in advising directors and creditors should be aware of the evidential standards required and the importance of choosing the correct legal route when seeking to wind up a company.