Inner 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. The companies also had a group facility of around £17m from the bank which was subject to cross guarantees by the group companies.

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 to Strathcroft 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 of 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 subsequent sale of 278 Glasgow Road to Clyde Gateway for £2.4m) 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 Stonegale
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.

Outer House Decision
In the Outer House 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 transfers 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 the £125k paid to him by the third party for the purchase of 64 Roslea Drive.

Appeal to Inner House
On appeal to the Inner House, Stonegale argued that Lord Malcolm had erred in reaching the conclusion that no consideration had been paid in respect of the transfers being challenged. Firstly, Stonegale contended that the fact that the bank was not aware of the sale to Clyde Gateway (and would not have discharged the standard securities if it had been) was irrelevant to the question as to whether consideration had been provided for the properties.  Secondly, Stonegale argued that the fact that the consideration had been paid to the bank by Strathcroft (and not Stonegale and Mr Pelosi Junior) did not preclude its contention that adequate consideration had been paid. Essentially Stonegale argued that the payment by Starathcroft to the bank (in return for which the bank discharged the standard securities over the properties) reduced Oceancrown’s debt to the bank (which was guaranteed by Loanwell and Questway) and that consideration could include the discharge of a debt. As the consideration was in excess of the open market value of the properties, it was “adequate”[4].

Decision
The Inner House refused the appeal.  It was noted that, although a court can conclude that alienation has been made for adequate consideration irrespective of what the individuals involved think, the intention of the individuals may be relevant if only because the alienation must be foradequate consideration. In this case the whole motivation for the transaction was to divert the company’s assets away from its creditors which was exactly what the legislation is intended to prevent. The argument that the consideration for the transactions was the reduction of the debt was an artificial construct which bore no relation to the intention of the controlling minds of the companies involved (Mr Pelosi and his son). Oceancrown could be taken to have received £2.4m but, in disponing 278 Glasgow Road, it had conveyed a property which its controlling mind had previously agreed to sell at that price. In the absence of further evidence, Oceancrown could be regarded as having received adequate consideration for 278 Glasgow road (the transaction for 278 Glasgow Road was not challenged) but not for the other properties. With regard to the argument that consideration could be the reduction of debt over which the companies were guarantors, it was noted that attaching a value to the reduction in debt over which the guarantee was held was difficult and complex. However, the court followed the guidance of Lord Drummond Young in Jackson v The Royal Bank of Scotland plc [5] to the effect that “if the transaction as a whole appears commercial it should generally be assumed that the consideration is adequate”. In this case the court found that:

 “[t]he transactions under consideration were devices for the diversion of assets from creditors, facilitated by a misrepresentation to the banker of the companies which were involved.  They were accordingly not commercial transactions.”

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] In terms of s242 of the Insolvency Act 1986.

[2] The administrators investigations indicated that the VAT element on the sale of 278 Glasgow Road had not been paid to HMRC.

[3] MacFadyen’s Trustee v MacFadyen 1994 SC 416 at 421

[4] In terms of s242 of the 1986 Act.

[5] 2002 SLT 1123 at 1128D.