In a recent opinion from the Outer House, Lord Lake declined to grant first orders in the winding-up petition of Nicholas Parkin v Ayres Wynd Developments Limited. The decision highlights that a debt must be undisputed if it is to be the ground relied upon in the winding-up petition.
The opinion also offers helpful procedural guidance, particularly on the persuasive use of detailed affidavit evidence by the successful party, and on the standing of parties to make representations at a first orders hearing.
This case provides us with a further reminder of the importance of companies having caveats lodged, especially where there is a risk of a creditor bringing a winding up petition.
Standing and Representation: The Importance of Caveats
A specific preliminary issue arose as to whether the respondents had standing to address the Court.
While it was accepted that the company, which had a caveat lodged, could be heard, it was argued that because the company was in voluntary liquidation (which was disputed), its directors no longer had title over the company, and therefore authority to instruct legal advisors.
Lord Lake noted that whether the company was in voluntary liquidation was not free from doubt, as the validity of the administrator’s appointment was contested and the subject of ongoing proceedings. To assume the company was in liquidation would, in effect, determine the outcome of the petition, which his Lordship did not find appropriate in the circumstances.
Accordingly, Lord Lake accepted that counsel was validly instructed on behalf of the company and heard submissions from all respondents.
He also confirmed that, as the petition procedure and hearing are public, any person in attendance or represented at the hearing who had an interest had a right to be heard.
In a further attempt to limit the scope of the first orders hearing, the petitioner made submissions that the Court had no discretion to refuse the first orders sought, with reference to Rule 14.5 of the Rules of the Court of Session, which states that the Lord Ordinary “shall” make first orders. Lord Lake, however, did not accept that submission, particularly in the face of Rule 5.1(d), which allows for caveats.
Lord Lake concluded that given that a person with a caveat had a right to be heard at a first orders hearing, it follows that the Court, having heard from that party, may decide not to grant the orders sought.
This is a useful clarification and again underlines the importance of caveats for companies that may be at risk of a winding-up petition.
In what circumstances would first orders be refused?
Before considering the facts, Lord Lake helpfully set out the test which is to be applied to decisions at a first orders hearing: that the order should be granted unless it is inevitable that the petition would not succeed (referring to authorities such as Foxhall & Gyle Nurseries Limited (1978) and PEC Barr (Holdings) Limited v Munro Holdings UK Limited (2009), which support this approach).
This makes sense, as refusing the first order would, in effect, determine the petition and could only be done if the respondents were bound to be successful in their opposition.
Grounds of Opposition and the Disputed Debt
Therefore, the Court considered the merits of the Petition.
For a petitioner to succeed in a liquidation petition, brought on the basis of the company being unable to pay its debts, they must prove both that they are a creditor of the company and that the company is unable to pay its debts as they fall due.
Lord Lake relied on the judgement of Mac Plant Services v Contract Lifting Services (2009), where Lord Hodge held that a winding-up petition is not the process in which to establish liability for a disputed debt. If the respondent company shows that the debt is disputed in good faith and on substantial grounds, the court will normally dismiss the petition. Honest belief alone is not enough; there must be substantial grounds for disputing the debt. This approach was echoed in the English case of IPS Law LLP v Safe Harbour Equity Distressed Debt Fund 3 LP ([2024] EWHC 2663).
In this case, the dispute as to whether the debt was outstanding had been ongoing for some time, with various court proceedings in relation to it. The petitioner submitted a claim for £1,377,788.79, supported by a spreadsheet and bank statements, but without an accompanying affidavit. The respondents accepted that sums were advanced but argued they had been repaid, lodging a detailed affidavit from a director and productions to vouch for the existence of the dispute.
Decision
Lord Lake concluded that this was a “paradigm case” of a substantial dispute, which ought not to be resolved in a petition for winding up. As the existence of the debt was the basis for the Petition and, on examination of the evidence presented, remained genuinely contested, it was inevitable that the respondents would succeed in their opposition. Accordingly, first orders were refused.
Interestingly, the Court noted that the Petitioner, as a director and shareholder of the company, was entitled to have sought the winding up on a just and equitable basis. If he had done so, the existence of the disputed debt would not have been an obstacle to first orders. However, as a result of seeking the petition on the basis of the company’s failure to pay its debts as they fall due, first orders were refused.
Conclusion
There are a number of useful takeaways from Lord Lake’s decision.
• The importance of caveats: but for the caveat, the first order would almost certainly have been granted, leading to the adverse impact that a provisional liquidator appointment has on a company.
• Debt as a basis for a petition: petitioners should be cautious when relying on a company’s inability to pay its debts as they fall due, where the subject debt may be in dispute. Where the Court views that dispute to be substantial, the petition is bound to fail, and first orders will be refused. Accordingly, a winding up petition is not a substitute for an action for payment.
• Just and equitable? A winding up petition on a just and equitable basis may be the preferential route where a debt is disputed.
