A charitable judgement

Edinburgh
david-menzies By David Menzies, ICAS Director of Insolvency

13 December 2016

A recent judgement issued in Edinburgh Sheriff Court concluded that companies limited by guarantee and without a share capital could be wound up by the relevant Sheriff Court. This is a significant departure from prior practice and case law and may open the possibility of significant cost reductions in obtaining winding up orders for charities.

Companies limited by guarantee in Scotland looking to petition the court to be wound up have thus far been thought to have to petition the Court of Session. A recent judgement issued by Sheriff Holligan at Edinburgh Sheriff Court in the case of A Limited [2016] SC EDIN 77 has however taken a different approach and concluded that Sheriff Courts have concurrent jurisdiction to consider such petitions.

The case considered by Sheriff Holligan concerned A Ltd (“the company”) which presented a petition for its winding up and is a company limited by guarantee.

Section 120 of the Insolvency Act 1986 ('the 1986 Act') provides:

  • "Section 120
  • (1) The Court of Session has jurisdiction to wind up any company registered in Scotland.
  • (3) Where the amount of a company’s share capital paid up or credited as paid up does not exceed £120,000, the sheriff court of the sheriffdom in which the company’s registered office is situated has concurrent jurisdiction with the Court of Session to wind up the company; ……”

Sheriff Holligan took time to consider the statutory interpretation of section 120(3) reflecting that subsection 3 could either mean that the concurrent jurisdiction of the sheriff court is only excluded should the company have a share capital in excess of £120,000; or that the jurisdiction is limited to companies having a share capital where that share capital does not exceed £120,000.

It was noted that there was only a single case which previously considered this matter (Pearce & Cannon 1991 SCLR 861) where it was concluded that the Court of Session had exclusive jurisdiction over companies without a share capital such as companies limited by guarantee.

Sheriff Holligan was however lead through a history of the legislation and commentary from various textbooks on the decision in Pearce & Cannon where authors pointed out that, at least prior to 1980, it was competent for guarantee companies and unlimited liability companies to have a share capital. The rights of guarantee companies in existence prior to 22 December 1980 and holding a share capital are preserved in legislation up to and including the Companies Act 2006. It was therefore submitted on behalf of the Company that the reasoning of the judgment in Pearce & Cannon was not correct.

Sheriff Holligan therefore considered that the matter is one of statutory interpretation and that it should be interpreted in accordance with the law as it currently is. Sheriff Holligan considered the approach of Parliament to the legislation and the general approach to division of jurisdiction between the Court of Session and Sheriff Courts noting that the Court of Session usually has exclusive jurisdiction over complex matters.

He concluded that the amount of share capital is, in itself, not necessarily an indicator of complexity. He also considered that there nothing in the nature of a guarantee company as such which makes its winding up particularly problematic or different from a company limited by shares and therefore that it was difficult to identify any particular reason to exclude guarantee companies from the jurisdiction of the sheriff court.

Given that many guarantee companies pursue charitable interests and possess modest assets there is, for reasons of cost, a positive argument in favour of the sheriff court having jurisdiction. When limiting the right of guarantee companies to have a share capital in 1980, Parliament made no amendment to the grounds of jurisdiction to make a winding up order, the inference being that the prior jurisdiction of Sheriff Courts was retained.

Sheriff Holligan concluded therefore that in his opinion the words of section 120(3) were wide enough to encompass the petition under consideration and he could see no reason, either by way of policy or other provision to read to section 120(3) as excluding from the jurisdiction of the sheriff court the power to wind up a company limited by guarantee company. The reading of section 120(3) should therefore be taken as where a company does have a share capital, the jurisdiction of the sheriff court is excluded should the share capital, paid up or credited as paid up, exceed £120,000. Otherwise, the sheriff court has, as the subsection provides, concurrent jurisdiction with the Court of Session to wind up a company.

Commentary

The judgement of Sheriff Holligan may be said to result in a charitable interpretation of the legislative provisions. Although the judgement is not binding on other Sheriff Courts, it could be a useful reference for potential liquidators or solicitors advising charities or other companies limited by guarantee on the approach and costs involved in winding up the company through the courts.

While approach taken by Sheriff Holligan may result in a pragmatic outcome in many situations, some may be surprised by his comments that there is nothing in the nature of companies limited by guarantee which makes its winding up particularly problematic.

Companies limited by guarantee are often used for charities. Attention should be given to provisions within the Charities and Trustee Investment (Scotland) Act 2005 and which often conflict with insolvency legislation. This particularly applies in relation to the requirement to give 42 days’ notice of the intention to wind up to OSCR and that Trustees (which are defined as those in control of the charity and therefore are likely to include a liquidator) may not be remunerated. It may be that the Court of Session remains a more appropriate court to resolve these legislative conflicts as part of the winding up application.

Topics

  • Charities
  • Insolvency
  • Legislation

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