Insolvency update – onerous property and disclaiming in Scotland

The Insolvency Act 1986 applies UK-wide so surely there isn’t much difference between an English corporate insolvency and a Scottish corporate insolvency? Well, there is certainly considerable overlap between the two jurisdictions but there are also many differences. One area of difference is disclaiming leases and onerous property.

For English and Welsh companies, sections 178-180 of the Insolvency Act 1986 allows a liquidator or administrator to disclaim onerous property and leases.  Disclaiming terminates the onerous obligation and any person who suffers loss or damage as a result of the disclaimer is treated as a creditor of the company and can make a claim in the insolvency process. There is no equivalent provision for Scottish liquidations and administrations.

Leases and obligations

Liquidators and administrators of Scottish companies are not necessarily lumbered with onerous obligations. The liquidator/administrator can refuse to perform contractual obligations of the company (as long as it is in the interests of the creditors to do so). Unlike disclaiming, refusal to perform does not terminate the contract.  However, the other party to the contract cannot compel the liquidator/administrator to perform the contractual obligations. Instead, they can made a claim in the insolvency process for losses stemming from the refusal to perform.

For leases, the liquidator/administrator must decide whether to adopt or abandon the lease.  As with other contracts, abandoning the lease does not result in its termination.  There are upsides and downsides to the lease remaining in place.  Landlords may enjoy the lease staying in place so that they do not end up with liabilities such as non-domestic rates.  The landlord can, of course, make a claim in the insolvency process for losses incurred due to the failure to perform.  These losses continue to accrue while the lease remains in place.  However, it is likely to be prudent for a landlord to ensure they properly manage the property and keep it secure and insured as the liquidator/administrator will not do that.

The difference in approach between the two jurisdictions can be particularly surprising for landlords.  The landlord of a Scottish property with an English company tenant that ends up in liquidation/administration could find their lease being disclaimed.  However, the same landlord with a Scottish company tenant would not be met with the same situation.

Land/heritable property

The lack of an equivalent of sections 178-180 in Scotland is particularly striking when it comes to land.  The liquidator/administrator cannot disclaim or abandon ownership in land.  They can only transfer that ownership, called a “real right”, to another person.  This can cause difficulties where the land in question is difficult to deal with, for example because of environment issues.  In the Joint Liquidators of the Scottish Coal Co Ltd, Noters 2014 SC 372, the court made it clear that the liquidator of a Scottish company could not abandon land owned by the company and could not abandon corresponding statutory environmental licences that ran with the land.  Instead, the liquidators needed to comply with the relevant statutory provisions in order to surrender the licences.  This contrasts with the position in England where the section 178 right to disclaim effectively trumps the environmental licence regime.

We are here to help

If you have any queries relating to any of the issues raised in this article, our team are are very well placed to assist. Please contact us here or email Eilidh.MacEwan@andersonstrathern.co.uk if you have any questions on this topic.