In a recent judgment in the Petition by Nicholas Parkin ("the petitioner") for an order to wind up Ayres Wynd Development Limited ("the respondent"), Lord Lake declined to grant first orders in a petition for the winding up, citing a substantial dispute over the existence of the debt upon which the petition was founded. The petitioner presented the winding up petition to the court with a motion for service, intimation and advertisement of the petition (known as 'first orders').
Prior to the petition being presented, the respondent had a lodged a caveat. A caveat is a document which obliges the court to inform solicitors acting for a respondent if an application is made for certain types of interim orders and in this particular case, it was first orders in a winding up petition. A caveat is an early warning tool entitling the respondent to make representations before an application is granted and could result in the order being refused.
In the present case, the caveat triggered when the motion for first orders was presented and an opposed motion hearing convened. The respondent and some of its former directors instructed legal representation for the hearing and sought to oppose the granting of the first orders.
The legal test for granting first orders
It was submitted by the petitioner that the legal test to be applied is that first orders should be granted unless it was inevitable that the petition would not succeed and referred his Lordship to two previous cases, where it had been held that first orders should be granted unless there was compelling reasons not to.
As to the potential grounds of opposition reliance was placed upon a decision of Lord Hodge in Mac Plant Services v Contract Lifting Services (2009 SC 125), which states:
“A winding up petition is not the process in which to establish the respondent company’s liability to pay a disputed debt. The petitioner will not be creditor for the purposes of section 124 [of the Insolency Act 1986] and thus will not have title and interest to seek the winding up, if the respondent company shows that the debt is disputed in good faith and on substantial grounds. The court will normally dismiss the petition if it is clear that there is such a dispute. But honest belief on the part of the respondent company is not enough to undermine the petitioner’s title. The respondent company must also show that there are substantial grounds for disputing the debt.”
In the present case, the petitioner seeks to wind up the company on the basis that it is unable to pay its debts as they fall due. The existence of the debt is therefore a critical issue. The petitioner, a director and shareholder in the respondent company, claimed the company owed him over £1.3 million and submitted bank statements and a spreadsheet in support of his claim. The respondents, in turn, argued that the sums had been repaid and provided an affidavit from another of the respondent's director asserting that the debt had been extinguished through payments to the petitioner and related entities in which he had an interest.
Lord Lake held that there was a substantial dispute between the parties in relation to the existence of the debt and therefore, it was inevitable that the respondent would succeed in its opposition. He therefore refused to grant first orders.
It is worth noting that had the petitioner advanced the petition on an alternative basis, a just and equitable winding up, the existence of the debt would not have been a critical issue and the outcome may have been different.
What if the Respondent did not have a caveat lodged?
In my view, had the respondent not lodged a caveat, there was a high likelihood that first orders would have been granted on the basis of the documents produced by the petitioner purporting to show the existence of the debt. In absence of a caveat, the respondent would not have been present at the hearing to oppose the granting of the orders and to put forward its position that the debt had been repaid.
Instead of being able to oppose the motion for first orders before it was granted, the respondent would likely have had to lodge answers to the petition process and progress to a full hearing on the merits to try to vindicate their position. The cost implications of that alone are significant. Additionally, in many cases, the advertisement of a winding up position can cause difficulties accessing or obtaining finance whilst the petition remains extant. In that situation, a respondent company can be placed under financial pressure not only in respect of trying to fund a legal defence but also because of restricted access to their bank accounts.
The key takeaway is that caveats represent an important and cost effective, risk mitigation and governance tool for all individuals and businesses conducting business in Scotland. This case serves as a reminder as to the power of caveats.
