Blog: Early dissolution of companies

Steven Jansch
Steven Jansch

The insolvency regime seems to be in a perpetual state of flux, writes Steven Jansch, partner and head of insolvency at Gilson Gray.

As a practitioner in either a legal or insolvency practitioner firm it is difficult to keep up. But we do sometimes get very useful assistance and guidance from the judiciary or the legislature. I am left wondering whether that is the case with some proposed changes to the early dissolution of companies.

The Public Services Reform (Insolvency) (Scotland) Order 2016 is currently in draft before the Scottish Parliament and is set to come into force in April. One of the changes it makes to the Insolvency Act 1986 is to change the words “If after a liquidator has been appointed under section 138 (appointment of liquidator in Scotland) it appears to the liquidator that the realisable assets of the company are insufficient to cover the expenses of the winding up, he may apply to the court for an order that the company be dissolved.” to “the liquidator may at any time apply”.

Not a huge change on the face of it, but viewed in context it highlights a practical problem often encountered in practice.

A liquidator often finds that the outlays and time costs that are necessary in properly progressing a liquidation will exceed the company’s assets. Sometimes that will be apparent on appointment, but sometimes that becomes apparent much later in the process. Take the example of a contingent assets in the form of an ongoing Court action. If the action succeeds, then there will be funds available to meet all of the costs of the process and also to pay creditors. However, if the action fails, then there is no funds from which to pay anyone. Similarly, if the action succeeds but the losing opponent then enters insolvency the successful claim may never be paid. That could be some time after the liquidator is appointed.

The idea of section 204 of the Insolvency Act is to enable the liquidator to draw the case to a close so as to avoid incurring costs that he will personally be obliged to pay. But the Courts rightly do not allow that to be used as a way to circumvent proper procedure. There have been few reported cases on section 204 applications, but there have been practice notes and guidance for practitioners issued by both the Sheriff Court and the Court of Session.

The case law acknowledges section 204 as an important part of the liquidation regime (Joint Liquidators of the Scottish Coal Company Limited CSOH 124) but also one that should only be used where the circumstances make it “appropriate” (Anderson (Liquidator of MHC Construction Limited), Applicant 2010 S.L.T. (Sh Ct) 193).

What is “appropriate” will of course depend on all of the circumstances of each particular case, but the Courts expect at least the following from applicants;

(1) The financial position of the Company, why the application is being made, and why it is being made at that particular time,

(2) Confirmation that the Petitioning Creditor has been made aware of the application being made (and has not objected to it), and

(3) Confirmation from the Liquidator that they are “not aware of any reason why it would not be appropriate for the Court to grant the order”.

Clearly the obligation is on the applicant to make the Court aware of all of the relevant circumstances when making applications for early dissolution. That has always been the case however so the changes to this part of the Act which are due to be brought in are likely to have no real impact in practice.

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