Case Preview: Brown & Anor, the Joint Administrators of Loanwell Ltd v Stonegale Ltd (Scotland)
29 Tuesday Mar 2016
The respondents are Joint Administrators of three companies, Loanwell Ltd, Oceancrown Ltd and Questway Ltd. All three companies were under the control of Mr Pelosi Senior who was director or shadow director and enjoyed beneficial interests in them. He also owned and controlled Strathcroft Ltd. His son Mr Pelosi Junior (an appellant) was the sole shareholder and director of Stonegale Ltd over which Mr Pelosi Senior also exercised control.
Oceancrown had obtained credit of £17.3 million from Anglo Irish Bank (AIB), with Loanwell and Questway cross-guaranteeing the debt and providing additional security.
On 10 November 2010, Oceancrown sold 278 Glasgow Road, Rutherglen, to Strathhcroft for £ 762,000. On the same day Strathcroft sold the same property to Clyde Gateway Development Ltd (Clyde) for £2.1m plus VAT of £367,500 (which was not paid to HM Revenue and Customs).
Later in November, Strathcroft instructed its solicitors (who were also acting for Oceancrown, Loanwell, Questway, Stonegale and Mr Pelosi Junior) to send AIB £2.414 million purportedly received from the sale of five properties, namely 64 Roslea Drive, Glasgow and 110, 210, 260 and 278 Glasgow Road, Rutherglen. 278 Glasgow Road having already been sold to Clyde for £2.1 million, AIB was led to believe it was being sold here for £762,000. £2.4 million was a sum equivalent to the open market valuations of all five properties. When AIB received the sums, it discharged the securities over the all properties. However, those sums came from the purchase price paid by Clyde to Strathcroft for 278 Glasgow Road. Later, on 24 November 2010, the four relevant dispositions were made, two from Oceancrown to Stonegale, one from Loanwell to Stonegale (110, 260 and 210 Glasgow Road) and one from Questway to Mr Pelosi Junior (Roslea Drive). They recorded that the properties above were sold for £1,652,000. In fact, no money was paid for them.
Section 242 of the Insolvency Act 1986 provides that, where a company enters administration, an alienation of the company’s property made on a relevant day is challengeable by the administrator. The court has the power to grant a decree of reduction or an order for such restoration of property to the company where such a challenge is upheld, however the court will not make an order if it can be established that the alienation was made for adequate consideration.
The Joint Administrators accordingly sought a reduction or an order for restoration of property in respect of the dispositions. These are sought against Stonegale Ltd in the action pertaining to Oceancrown and Loanwell, and against Mr Pelosi Junior in the action pertaining to Questway. Those actions are opposed by the companies on the basis that the alienations were made for adequate consideration.
In the first instance, the judge found, that the open market value of the four properties (all above mentioned properties except 278 Glasgow Road) was £1.5 million.
In order that Stonegale could purchase the properties, Strathcroft had loaned Stonegale the sum of £1.584 million. The Lord Ordinary decided that the loan agreement was a sham and that, in fact, no consideration whatsoever had been made in respect of the alienations. Accordingly, the Lord Ordinary granted decree of reduction in respect of two dispositions by Oceancrown and one disposition by Loanwell. The Lord Ordinary ordered payment of the £125,000 in favor of Questway.
Inner House decision
Stonegale appealed on the basis that the Lord Ordinary had erred in finding that no consideration had been paid in respect of the alienation of the properties under challenge.
The Court of appeal decided that:
- The discharge or reduction of a debt can amount to consideration.
- In this case the main actors were Mr Pelosi Senior, whose intention was to divert assets away from the group’s creditors, those who were acting simply as his tools and those whom Mr Pelosi Senior had misled. The whole motivation for the transaction was the diversion of assets away from creditors, which is exactly what section 242 of the Insolvency Act is intended to prevent.
- AIB only agreed to discharge the standard securities over the four properties because it was unaware of the price Clyde was prepared to pay for 278 Glasgow Road.
- The Inner House agreed with the first instance court’s findings that no party gave the sellers anything in return for the conveyances under challenge. Any value received was the value paid in respect of number 278 Glasgow Road. The Strathcroft paid the bank monies which were designed to, and did persuade the bank to discharge the standard securities over the five properties, all in order to facilitate the subsequent gratuitous sales of the other four properties. It was a mechanism for allowing the inter-company transfers which it was hoped would achieve the retention of the “profit” on 278 Glasgow Road within the group – and free of the bank’s securities.
On these grounds the Inner House dismissed the appellants’ appeal.
Supreme Court appeal
The appellant was granted leave to appeal by the Supreme Court. On 15th of February 2016 the case was heard by a panel of five – Lord Neuberger, Lord Reed, Lord Carnwath, Lord Sumption and Lord Hodge.
The court will be looking at the issue of whether the sums remitted to AIB by Strathcroft Ltd amounted to adequate consideration for the purposes of an application under the Insolvency Act 1986, s 242(4)(b) for the court to restore the property to the companies.