Outer House Case in which the administrators of Oceancrown Ltd and other associated companies (including Loanwell Ltd and Questway Ltd) sought reductions of the sales of various properties by the companies as gratuitous alienations[1].

Background
The companies in administration were part of a group under the control of a Mr Pelosi. The group was involved in the development and letting of commercial and residential properties. Mr Pelosi had effective control of all of the companies which were operated as one enterprise and operated on the basis of one bank account in the name of Questway Ltd.

Mr Pelosi negotiated the sale of 278 Glasgow Road, Rutherglen to Clyde Gateway Development Limited. On 10 November 2010 Oceancrown disponed 278 Glasgow Road to Strathcroft (then 99% owned by Mr Pelosi) for £762k. On the same day Strathcroft disponed the same property to Clyde Gateway for £2.1m (plus VAT of £367.5k[2]).

The bank’s solicitors were advised that sale of 278 Glasgow Road was part of a series of transactions also involving 110, 210 and 260 Glasgow Road, and 64 Roslea Drive (owned by Oceancrown, Loanwell and Questway and over which the bank held standard securities), the total sale price for which was £2.414m. When the bank’s solicitor (who was unaware of the sale of 278 Glasgow Road to Clyde Gateway) received the sale proceeds, it delivered discharges of the securities. Dispositions were executed (On 24 November 2010) transferring 110, 210 and 260 Glasgow Road to Stonegale Limited (of which Mr Pelosi’s son was the sole shareholder and director) and 64 Roslea Drive to Mr Pelosi’s son. The son then sold 64 Roslea Drive to a third party for £125k. Although no money was paid, the dispositions for the four properties recorded a consideration of £1.652m in total. Stonegale did not dispute that all the funds paid to the bank to discharge the securities came from the purchase of 278 Glasgow Road by Clyde Gateway.

Argument for the administrators
The administrators argued that a large proportion of the money received from Clyde Gateway (in respect of 278 Glasgow Road) was attributed to the other dispositions in order to make it appear that the transfers to Stonegale and Mr Pelosi’s son were made for consideration. In the view of the administrator, the back-to-back sale and transfers had been structured so as to keep £1.7075m out of reach of the bank and to transfer the properties to Stonegale and Mr Pelosi’s son for no consideration. The court was therefore asked to reduce the transfers of 110, 210 and 260 Glasgow Road, and 64 Roslea Drive.

Argument for Stongale
Stonegale argued that the issue for the court was whether the alienations of 110, 210 and 260 Glasgow Road and 64 Roslea Drive, Glasgow were made “for adequate consideration”. Oceancrown, Loanwell and Questway had each received consideration which was paid to their secured lender. The parties agreed that the sums attributed to 110, 210 and 260 Glasgow Road, and 64 Roslea Drive exceeded their market value. The source of the funds was irrelevant. The bank had decided to discharge the security over 278 Glasgow Road on the basis of a valuation it had received and had made a bad bargain. The other transactions were separate. Consideration had been paid to Oceancrown, Loanwell and Questway as they had reduced their indebtedness to the bank.

Decision
Lord Malcolm found otherwise. “Consideration” is “something which is given, or surrendered, in return for something else”[3] No one paid anything for 110, 210, 260 Glasgow Road and 64 Roslea Drive. Oceancrown, Loanwell and Questway did not receive anything in return for the dispositions. They gifted the properties to the disponees. The fact that the bank was misled into using part of the sale price of 278 Glasgow Road to discharge all the standard securities did not supply the missing consideration. If the bank had known that 278 Glasgow Road had been sold for £2.4m, the same overall reduction in bank indebtedness would have occurred, but only the standard security over 278 Glasgow Road would have been discharged. The tranfsfers under challenge were gratuitous alienations. As such, reductions of the dispositions of 110, 210, 260 Glasgow Road were granted and Mr Pelosi’s son was be ordered to repay (to the administrators) the £125k paid to him by the third party for the purchase of 64 Roslea Drive.

The full judgement is available from Scottish Courts here.

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