Against the backdrop of the insolvency of Scottish companies carrying on business in India, a recent decision of the Inner House of the Court of Session has considered the competency of seeking declaratory orders in petition procedure.
In October 2016, we reported on a Court of Session decision which concerned three Scottish registered companies carrying on business in India and which had been placed into administration under the Insolvency Act 1986.
This was the first examination by a Scottish court of the principle of ‘modified universalism’ and the requirements for an enforceable floating charge where all of a company’s property is situated in a non-UK jurisdiction. For our original legal update, please click here.
The background to that decision was the entering into of contracts by the administrator for the sale of the business and assets of all three companies. In summary, the purchaser sought declaratory orders from the court to the effect that the administrator was entitled under the Insolvency Act to enter into such contracts, and that the sale was valid under Scots law. The purpose of such orders was to enable the sale to be ratified by the Indian court.
Petition or ordinary procedure?
As well as the substantive issues considered in our earlier legal update, Lord Tyre also considered the procedural question of whether it was competent to seek such declaratory orders by way of petition procedure in the Scottish court, as opposed to ordinary action procedure. He held that it was incompetent to do so, and his decision on this point was appealed by the purchaser to the Inner House of the Court of Session.
Hooley Limited v Ganges Jute Private Limited  CSIH 40
This appeal presented an opportunity for the Inner House to consider afresh the general competency of petition procedure and examine the essential features of both petition and ordinary procedure.
The court’s starting point was to consider that the essential feature of an ordinary action is that it involves the court deciding what the rights and obligations of the parties to the action are, and providing mechanisms for their enforcement.
In contrast, petition procedure involves intervention by the court that goes beyond the determination of rights and obligations. Indeed, the court said that the need for its intervention is the critical feature which determines whether or not petition procedure is required. The court also said that such intervention will, in contrast to ordinary actions, normally involve an important element of judgment by the court, in some cases going as far as a discretion.
The court said that the reason for such intervention will usually arise in two situations:
- In cases where the court is asked to innovate on the parties’ existing rights and obligations (such as applications to the nobile officium); and
- More commonly, where the order sought has consequences which affect third parties who are not represented. In such cases, if the effect on third parties is direct and reasonably significant, the court said that it was clearly desirable for it to give independent consideration to the potential consequences of an order, to ensure that such third parties were not unfairly affected.
Examples given by the court of the latter category included:
- Petitions for reduction of share capital under section 645 of the Companies Act 2006, where the reduction of capital would inevitably have potential implications for the creditors of the company, and may also raise questions as among the various classes of shareholders;
- Petitions for sequestration and corporate insolvency, where it was very obvious that third parties would be affected by the order; and
- Applications to the court for the variation of trust purposes.
In summary, the Inner House was of the view that the two situations set out above covered the great majority of cases where the use of petition procedure was justified.
The declaratory orders sought
Returning to the particular declaratory orders sought in this case, the court considered that they went beyond merely determining the existing rights of the parties. Instead, they were intended to provide the Indian court with a definitive statement as to the legal position of the transactions in question under Scots law. As such, the consequences of the court’s decision could affect a range of third parties through the Indian proceedings, and the use of petition procedure was therefore both justified and competent.
The Inner House did recognise that ordinary procedure is the standard way in which a declarator is obtained, and that this was a case where either procedure could be used, but considered that from the point of view of presentation of Scots law to the Indian courts, use of the petition procedure had definite advantages.
For the full text of the opinion, please click here.
Stuart Clubb is the joint head of litigation services in Scotland and has significant expertise in insolvency litigation.