Insolvency briefing: the concept of a claim being “merely shadowy” has been considered in a petition for restoration of a company

A petition for the restoration of a company is generally an administrative matter, and it is rare that significant judicial scrutiny is brought to bear. In MCR Oil Tools LLC, Petitioner [2020] CSOH 5 (10 January 2020) the Lord Ordinary was asked to consider the test to be applied where restoration was sought in order to pursue foreign proceedings against the restored companies.

Background

The petition was raised against the background of proceedings in Texas seeking various remedies against two dissolved companies and others. Briefly, those claims involved allegations of breach of contract by the two companies, and the wrongful appropriation of intellectual property by third parties (within the same group).

Part of the claim rested on “piercing the corporate veil”. The law which applied to this piercing was agreed to be Scots law, albeit the issue would be decided by the court in Texas.

The proceedings in Texas had been raised in ignorance of the dissolution of the two companies. Restoration was therefore required in order to continue with the Texas proceedings.

Principles for restoration

Section 1029 of the Companies Act 2006 allows an application to the court to be made by (amongst others) any party “with a potential legal claim against the company”. Under s 1031, the court may order the restoration (inter alia) where it “considers it just to do so”.

The question of what is “just” has been the subject of judicial attention, and was central to the argument in this case. The Lord Ordinary examined previous case law and identified certain principles which fell to be applied, in particular:

  • Where a company is to be restored to allow a claim to be made against it, the applicant’s interest does not require to be firmly established, nor highly likely to prevail. It is sufficient that it not be “merely shadowy”.
  • Provided the application falls within the general purpose in the legislation, the company ought to be restored. Whether that restoration achieves its purpose would be decided by another tribunal in the future.
  • The ability to restore the company does not depend on there being a cause of action at the time of dissolution.
  • What is “just” will depend on the circumstances in each case.
  • Where one of the grounds for restoration in s 1031(1) is satisfied, the court has discretion as to whether to restore the company to the register. However, that discretion should only be exercised against restoration where special circumstances exist.

It was conceded that where the purpose of the restoration was to allow a claim to be brought, the court would not normally engage in detail with the prospects of success. However, it was argued that the court did require to consider whether the claim was “merely shadowy”.

It was contended that the claim to pierce the corporate veil had no prospect of success and was therefore “shadowy”.

Not so shadowy

Having examined the principles above derived from case law, the Lord Ordinary then applied them to this case.

As the petitioner fell within one of the “gateways” for the bringing of the application under the 2006 Act, the court would ordinarily grant the application unless there was no benefit or purpose to the restoration, or exceptional circumstances existed, or the claim was “merely shadowy”.

“Shadowy” was not defined. However, it did not require the claim to be firmly established or highly likely to prevail. A claim that was “pretty speculative” was not “shadowy”. Claims which might be “shadowy” might be described as “imaginary, vague, nebulous, faintly perceptible or of an uncertain nature”. The test was not legal relevancy. That was a matter for another court to decide.

In this case the court concluded that the companies should be restored, and did so on four grounds:

  1. The application was backed by affidavits from experienced Texan attorneys confirming their opinion that there was a proper basis for the claim. The fact that there were contrary affidavits for the respondent was not a matter for the court to delve into.
  2. The court was not persuaded that the case for piercing the corporate veil was bound to fail.
  3. Even if it were, the Texan claim was not wholly predicated on the success of that argument.
  4. In any event, regardless of the likelihood of success of these arguments as a matter of law, it could not be said that the argument on piercing the corporate veil was “merely shadowy”. The threshold had therefore been met.
Andrew Foyle
The Author

Andrew Foyle, solicitor advocate, joint head of Litigation (Scotland), Shoosmiths

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