The Court of Session has held that a liquidator of a company being wound up in Scotland may abandon both heritable property and statutory licences. Affected creditors will have the right to submit a claim in the liquidation process. In the absence of that creditor holding security, the claim will rank as an unsecured claim.

Background

As insolvency practitioners will be well aware, the terms of s178 of the Insolvency Act 1986 (the “Act”) permit a liquidator of a company being wound up in England and Wales to disclaim onerous property but the statute confers no equivalent statutory rights for a liquidator of a company being wound up in Scotland. Until now, it has not been clear whether the liquidator of a company being wound up in Scotland, who enjoys under statute the same rights as a trustee of a bankrupt estate (including the ability to abandon pre-insolvency contracts of the debtor) also has the right to abandon heritable property and statutory licences.

Given the ambiguity, and the particular nature of Scottish Coal’s heritable assets and statutory licences, the joint liquidators of the Scottish Coal Company Limited (the "Company") sought (amongst others) the following directions from the Court:

  1. Whether the liquidators had the power to abandon property owned by the Company; and
  2. Whether the liquidators had the power to disclaim the Company's statutory licences, absolving the liquidators of the responsibility to pay for costs of compliance with the licences.

First direction

It was held that a liquidator may abandon property owned by a company. The Court was of the view that a trustee of a bankrupt estate may disclaim a contract creating property rights and this was extended to allow the abandonment of the property itself. The effect of s169 (which gives a Scottish liquidator the same rights as a trustee in sequestration) is that this right of abandonment also extends to a liquidator, subject to compliance with any statutory regime.

Second direction

It was held that a liquidator may also disclaim statutory licences. The effect of the disclaimer is that the Company’s obligation to meet the costs of compliance with the statutory licences will fall away, subject to the affected creditor’s right to prove for their loss in the liquidation. This means that the compliance costs that would otherwise arise will not rank ahead of the liquidator’s own costs.

Analysis

The decision confirms that the powers of a liquidator of a company being wound up in Scotland to abandon onerous property are largely in line with the statutory position that applies in England under s178 of the Act. The decision will facilitate the appointment of liquidators to companies with extensive liabilities, for the purposes of managing those liabilities for the benefit of the company’s creditors as a whole. Had the Court found that the liquidator had no right to abandon property and statutory licences, and that the ongoing costs of compliance would rank as an expense of the liquidation (ahead of the costs of the liquidator), it is foreseeable that insolvency practitioners would be loath to be appointed as liquidators to companies with onerous liabilities of a similar nature.The flip side is that, in abandoning onerous liabilities, the associated costs will revert to those creditors or other third parties. In the case of the Company, the remaining assets of the Company will not be applied to meet the remediation obligations that arise under the statutory licenses, leaving the costs to fall to the public purse.

This is a verbal decision issued by the Court on 11 July 2013. The written decision is expected shortly, and we will issue another update at that time.