No debt without a debtor: the effect of a company’s dissolution on its obligations
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On 27 November the Sheriff Appeal Court held that it is a necessary condition for there to be an obligation that two persons are party to it, and so where there is no debtor, there is no debt.
In Wright v Wright EDI-A337-23, the pursuer sought to call up a standard security granted by the defender for a debt of £210,000 that had been owed to her by a company. Before the action was raised, the company had been wound up and dissolved. The defender argued at debate that the dissolution of a company extinguished its debts and, a security obligation being accessory to the primary obligation it secured, once there was no debtor and no debt, nothing was secured, so the security could not be called up.
The sheriff disagreed, holding that although the debts or obligations of a dissolved company were unenforceable unless or until the company was restored to the Register of Companies, they were not extinguished by the company’s dissolution but remained extant, so that a third party standard security for those obligations remained enforceable.
The defender appealed to the Sheriff Appeal Court. Giving the judgment of the Court, Appeal Sheriff Mann said that:
There is no doubt that dissolution of a company results in its extinction. Were that not so there would be no need for section 1032 of the Companies Act 2006 which provides that ‘The general effect of an order by the court for restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register.’ Unlike in the case of a natural person, whose estate remains liable for his obligations on his demise, there is no person who steps into the shoes of a dissolved company. There is, therefore, no person who can come under the obligations which bound the company as at and prior to its dissolution. … as long ago as the eighteenth century Sir William Blackstone, in Book 1 at page 484 in his Commentaries on the Laws of England stated that: ‘The debts of a corporation either to or from it are totally extinguished by its dissolution: so that the members thereof cannot recover or be charged with them in their natural capacities’. … Lord Atkin in his obiter remarks in the House of Lords in Russian and English Bank v Baring Bros & Co Ltd [1936] AC 405 at p.427 [said that]: ‘The debts of a corporation either to or from it are totally extinguished by its dissolution … The principle is stated absolutely’. We take the same view of Blackstone’s commentary as did Lord Atkin … Blackstone’s commentary sits easily with section 1029(2) of the Companies Act 2006 which provides that an application for restoration of a company may be made under paragraph (e) by ‘any person who but for the company’s dissolution would have been in a contractual relationship with it’ and under paragraph (i) by ‘any person who was a creditor of the company at the time of its striking off or dissolution’. It must follow … that whilst the company remains dissolved a person who would have been in a contractual relationship with it is not in a contractual relationship with it and there is, therefore, no contract. If there is no contract there can be no debt or obligation due under it. It is not obvious why the mere possibility of restoration would change that.
Section 11 of the Conveyancing and Feudal Reform (Scotland) Act 1970 provides that a standard security, once registered, provides a real right in security for the performance of the contract to which it relates. If there is no contract there is nothing to be performed. It follows that if there is no contract there can be no security. … [The appellant’s] submission that the standard security, being accessory to the obligation which it secures, cannot be enforced when the primary obligation ceases to exist is sound. Unless the contract to which the standard security relates makes the security givers … directly responsible for the obligations towards the creditor in the standard security, nothing remains to be secured. No such provision was prayed in aid by the respondent. The standard security is unenforceable whilst the company remains dissolved.
The appellant was represented by Michael Upton, advocate, instructed by Davidson Chalmers Stewart LLP; the respondent by Conner McConnell, solicitor, of Gillespie Macandrew LLP.
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