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On 22 June 2016, the Supreme Court upheld the judgment of the Lord Ordinary that certain property conveyances relating to insolvent companies were gratuitous alienations such that three of them were to be set aside and £125,000 was to be repaid for the sale of a fourth property. This decision had been upheld by the Extra Division of the Inner House of the Court of Jack_Ballantyne_ph[1]Session.


Background

Proceedings were brought by the joint administrators of Oceancrown Ltd, Loanwell Ltd and Questway Ltd (the “Companies”) regarding the alienations of four of their Glasgow properties nine months before the Companies went into administration. The respondents argue that the transfers were gratuitous alienations i.e. gifts by an insolvent party that are challengeable by liquidators or administrators. Under the Insolvency Act 1986, s 242, a company may have its assets restored or receive other appropriate redress if the person seeking to uphold the alienation is unable to establish that adequate consideration was received in exchange for the transfer.

Ralph Norman Pelosi (“Mr Pelosi senior”) controlled the corporate group which included the Companies. Norman Ralph Pelosi (“Mr Pelosi junior”) was the director and sole shareholder of Stonegale Ltd. Three properties were transferred from the Companies to Stonegale Ltd and one property was transferred to Mr Pelosi junior directly prior to the Companies’ administration in 2011.

Anglo-Irish Bank (the “Lender”) held securities over five properties owned by the Companies as part of a £17.3 million loan facility for Oceancrown Ltd. The Lender discharged securities on all five properties following notification of the sales of each of them. Under the instruction of Mr Pelosi senior and described as “in respect of purchases of [the five properties]”, £2.4 million was transferred to the Lender. In reality, the price obtained from the sale of a single property was used to facilitate the release of security for all five properties as no sales had been agreed for the other four.

Stonegale Ltd and Mr Pelosi junior appealed the decision to the Supreme Court arguing that the four conveyances under challenge were made by the Companies for adequate consideration. The appellants argue that the respondents should have pursued alternative remedies including Mr Pelosi senior’s fiduciary duties as a company director or remedies for the Lender for fraudulent misrepresentation.

The judgment

The Supreme Court dismissed the appeal brought by Stonegale Ltd and Mr Pelosi junior. The unanimous judgment was given by Lord Reed, who acknowledged that there were other remedies available to the respondents. These alternative remedies were, however, considered irrelevant as the judgment elected to determine only whether the appellants were entitled to the remedy currently sought under s 242.

The judgment illustrated a clear division between the sale and purchase of one property for £2.4 million and the conveyance of the other four properties for no consideration. Although the Lender had discharged security on all five properties in exchange for the sum of £2.4 million this did not amount to adequate consideration:

“No party gave the sellers anything in return for the conveyances under challenge.”

The judgment also considered a loan agreement signed by Mr Pelosi senior under which Stonegale Ltd allegedly financed the sale of three of the properties. The agreement was considered a sham produced purely to support the appellants’ defence of the proceedings.

Following an analysis of the various transactions that took place, the judgment concluded that the four properties had been transferred illegitimately:

“There was no reciprocity between those disposals and the earlier payment made to the bank. The purpose and effect of those transactions was to divert assets away from the companies’ creditors: exactly what s 242 is intended to prevent. That they were gratuitous alienations is plain and obvious.”

Comment

The judgment serves as reminder of the effect of s 242 in protecting insolvent companies and their creditors from attempts to disperse assets. The burden of proof is on the transferee receiving the assets of an insolvent company to establish a statutory defence. In this case, there was no adequate consideration for the conveyance of the four properties to Mr Pelosi junior and Stonegale Ltd as neither the appellants, nor any other party, were found to have paid anything in exchange for the four properties. The only proceeds from the sale of the five properties were paid by a third party, Clyde Gateway Development Ltd, in relation to a property that was not transferred to the appellants. Although a substantial fee was paid, there was no reciprocity between the £2.4 million sum said to constitute consideration and the specific property assets in question.