Scottish Court of Session Establishes New Guidelines for Winding-Up Applications via Note in Insolvency Proceedings

Introduction

The case of Chad Griffin and Thomas Campbell MacLennan as Joint Administrators of Alexander Inglis and Son Ltd ([2024] ScotCS CSOH_12) presents significant developments in Scottish insolvency law. Appointed as administrators in May 2021, Griffin and MacLennan sought to transition from administration to liquidation through a court note, requesting the winding up of Alexander Inglis and Son Ltd (the company) and the fixation of their remuneration at 20% of asset recoveries. This commentary examines the court's reasoning, the legal principles applied, and the implications of this judgment for future insolvency proceedings in Scotland.

Summary of the Judgment

The Scottish Court of Session, presided over by Lord Braid, addressed four primary orders sought by the noters (administrators): the cessation of their administration roles, discharge from liability, winding up of the company under the Insolvency Act 1986, and fixing their remuneration at 20% of realized assets. The court approved the first two orders without contention but delved into the legality and appropriateness of the latter two. While the court validated the transition to liquidation via a note—a relatively novel approach—it rejected the proposal to set the liquidators’ remuneration at 20%, deeming it excessive and procedurally flawed.

Analysis

Precedents Cited

The judgment referenced several key precedents that influenced the court’s decision:

Re Graico Property Co Ltd (In Administration) [2016] EWHC 2827 (Ch): Affirmed the court’s broad discretion under paragraph 79(4) of schedule B1 to make any order, including winding-up orders, even in the absence of a formal petition.
Brook v Reed (Practice Note) [2012] 1 WLR 419: Highlighted the potential for percentage-based remuneration to become disproportionately high, especially with easily realizable assets.
Mirror Group Newspapers plc v Maxwell [1998] BCC 324: Established that courts must consider all circumstances when determining liquidator remuneration.
Liquidator of St Margaret's School, Edinburgh, Ltd, Noter 2013 SLT 241: Emphasized the court’s authority as the ultimate arbiter of fair remuneration for liquidators.

These cases collectively underscore the judiciary’s careful scrutiny of applications that deviate from standard insolvency procedures, especially concerning remuneration structures and procedural innovations.

Legal Reasoning

The court's reasoning was multifaceted:

Competency of Applying via Note: The court affirmed that paragraph 79(4) of schedule B1 grants expansive authority, allowing the court to issue any appropriate order, including winding up the company without a formal petition, provided that the statutory circumstances for winding up are met.
Appointment of Liquidator: Contrary to traditional interpretations, the court held that under section 140 of the Insolvency Act 1986, administrators in Scotland could be appointed directly as liquidators without necessitating an interim liquidator. This interpretation aligns Scottish practice more closely with that of England and Wales, promoting procedural efficiency.
Remuneration at 20%: The court rejected the fixed 20% remuneration proposal, highlighting that remuneration should be determined post-liquidation based on actual work and outcomes. Pre-fixing remuneration, especially at a high percentage, contravenes the principles outlined in relevant rules and precedents aiming to prevent unjust enrichment.

The court emphasized adherence to the procedural safeguards embedded within the Insolvency Act and associated rules, ensuring that deviations like fixed percentage remuneration do not undermine fairness and transparency in liquidation processes.

Impact

This judgment has several potential implications for future insolvency cases in Scotland:

Procedural Flexibility: By endorsing the use of notes for winding-up applications, the court provides insolvency practitioners with a more streamlined pathway to transition from administration to liquidation, potentially reducing costs and expediting proceedings.
Remuneration Practices: The rejection of fixed percentage remuneration underscores the necessity for liquidators to seek remuneration based on actual work performed. This promotes accountability and ensures that remuneration structures remain fair and proportionate.
Alignment with Other Jurisdictions: The interpretation that Scottish courts can appoint administrators directly as liquidators without interim appointments aligns Scottish insolvency practice more closely with that of England and Wales, potentially fostering greater consistency across UK jurisdictions.

Overall, the judgment reinforces the importance of procedural integrity and fair remuneration in insolvency proceedings, setting clear boundaries for practitioners in Scotland.

Complex Concepts Simplified

Noters and Liquidators

Noters: In Scottish insolvency law, noters are legal professionals appointed to carry out the administration of an insolvent company. They are responsible for managing the company’s affairs, attempting to rescue the company or achieve a better outcome for creditors.

Liquidators: Liquidators are appointed to wind up a company’s affairs, realizing assets, paying creditors, and distributing any remaining funds. They are essentially the final step in dissolving a company’s existence.

Winding-Up Order

A winding-up order is a court order that commands the dissolution of a company. Once a company is wound up, its assets are liquidated to pay off creditors, and the company ceases to exist.

Administration vs. Liquidation

Administration: A process aimed at rescuing a financially troubled company by reorganizing its affairs under the supervision of administrators.

Liquidation: The process of winding up a company’s affairs, selling its assets, and distributing the proceeds to creditors.

Conclusion

The judgment in Chad Griffin and Thomas Campbell MacLennan as Joint Administrators of Alexander Inglis and Son Ltd marks a pivotal moment in Scottish insolvency law. By affirming the court’s authority to transition from administration to liquidation via a note and refining the parameters for liquidator remuneration, the court has provided clearer guidelines for insolvency practitioners. This decision underscores the judiciary’s commitment to procedural efficiency, fairness in remuneration, and alignment with broader UK insolvency practices. Stakeholders in insolvency proceedings—be they administrators, liquidators, creditors, or legal advisors—must take heed of these developments to navigate future cases effectively and in compliance with established legal standards.