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.

Supreme Court case of some complexity in which the Liquidator of the Letham Grange Development Company sought reduction of a security over the Letham Grange resort near Arbroath. The case involves a number of companies all controlled by a Mr Liu and his family.

The Liquidator argued that the holder of the security, Foxworth (a company controlled by Mr Liu), had not acquired the rights under the security in good faith and for value. The Liquidator had previously successfully challenged a disposition by Letham Grange in favour of Nova Scotia Limited (also a company controlled by Mr Liu) on the basis that it was a gratuitous alienation. (The property which had been purchased by Letham Grange for £2,105,000 was sold to Nova Scotia for only £248,100.)

In the Outer House Lord Glennie found that there had not been a gratuitous alienation accepting Mr Lui’s evidence that the price had been reduced as there had been loans made by Mr Liu’s family in favour of Letham to finance the original purchase and that Foxworth (having assumed liability) was obliged to repay those loans to the family.

The Inner House have allowed an appeal finding that, to avoid a gratuitous alienation, the consideration given in exchange for the granting of the disposition of the resort to Nova Scotia required to be enforceable at the time when the disposition was granted. However, at that date, there was no enforceable obligation binding Nova Scotia to repay the loans to the family. Even if that had not been the case, taking account of all of the circumstances, the Inner House found that the various transactions surrounding Letham Grange had been intended to defeat the claims of lawful creditors.  For those reasons a decree granting reduction of the standard security was given. The Inner House also found that Lord Glennie had failed to give satisfactory reasons for the factual conclusions he had reached on the evidence.

The Supreme Court unanimously allowed an appeal of the Inner House decision.  Whilst the Inner House had been correct to identify that an appellate court can interfere where it is satisfied that the trial judge has gone “plainly wrong”, it had erred in concluding that Lord Glennie had been “plainly wrong” in this case.

Lord Glennie had clearly understood that the critical issue was whether “the alienation was made for adequate consideration”. He was aware that an obligation on the part of Nova Scotia could only constitute part of the consideration for the sale if it was undertaken as the counterpart of the obligations undertaken by Letham Grange. His opinion had focused whether, and not when, any obligation was taken to assume the Letham Grange debts and he had been entitled to accept Mr Liu’s evidence on that point. The Supreme Court noted that Lord Glennie had taken into account the various criticisms of Mr Liu’s evidence before concluding that his evidence was credible and reliable and also noted that the weight given to the material evidence was pre-eminently a matter for the trial judge (subject only to the requirement that his findings be reasonable).

The full judgement is available from the Supreme Court here.

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

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.

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

Inner House case of some complexity in which the Liquidator of the Letham Grange Development Company sought reduction of a security over the Letham Grange resort near Arbroath. The case involves a number of companies all controlled by a Mr Liu and his family.

The Liquidator argued that the holder of the security, Foxworth (a company controlled by Mr Liu), had not acquired the rights under the security in good faith and for value. The Liquidator had previously successfully challenged a disposition by Letham Grange in favour of Nova Scotia Limited (also a company controlled by Mr Liu) on the basis that it was a gratuitous alienation. (The property which had been purchased by Letham Grange for £2,105,000 was sold to Nova Scotia for only £248,100.)

In the Outer House Lord Glennie found that there had not been a gratuitous alienation accepting Mr Lui’s evidence that the price had been reduced as there had been loans made by Mr Liu’s family in favour of Letham to finance the original purchase and that Foxworth (having assumed liability) was obliged to repay those loans to the family.

The Inner House have allowed an appeal finding that, to avoid a gratuitous alienation, the consideration given in exchange for the granting of the disposition of the resort to Nova Scotia required to be enforceable at the time when the disposition was granted. However, at that date, there was no enforceable obligation binding Nova Scotia to repay the loans to the family. Even if that had not been the case, taking account of all of circumstances, the Inner House found that the various transactions surrounding Letham Grange had been intended to defeat the claims of lawful creditors.  For those reasons a decree granting reduction of the standard security was granted.

The full judgement is available from Scottish Courts here.

(NB: See appeal to the Supreme court here.)

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

Complicated case in which the Liquidator of the Letham Grange Development Company sought reduction of a security over the Letham Grange resort near Arbroath. The case involves a number of companies all controlled by a Mr Liu and his family.

The grounds for challenge

The Liquidator argued that the holder of the security (Foxworth) had (1) not acquired the rights under the security in good faith and for value and (2) the security was void as it was not in the correct form.

Good faith and value

Prior to this case the Liquidator had challenged a disposition by Letham Grange in favour of Nova Scotia Limited on the basis that it was a gratuitous alienation, an unfair preference (both in terms of the Insolvency Act 1976) and a fraudulent preference at common law.  The subjects which had been purchased by Letham Grange for £2,105,000 were sold to Nova Scotia for only £248,100. The Liquidator had previously obtained a decree reducing the disposition (effectively by default when Nova Scotia failed to appear at a proof).

However, in the present proceedings Mr Liu argued that the price contained in the disposition was not the full consideration for the subjects as the price had been reduced to take account of loans which Mr Liu and his family had made to Letham Grange in order to finance the purchase. Foxworth then assumed liability to repay the loans to the family and Nova Scotia granted the standard security over the property in favour of Foxworth.

After consideration of the evidence and an assessment of the credibility of the witnesses, Lord Glennie found that the sale had been for adequate consideration and there had not been a gratuitous alienation. There had been loans by the family in favour of Letham to finance the original purchase and, although Foxworth had imputed knowledge of the facts pertaining to the sale to Nova Scotia (through Mr Liu who was in control of both companies), it did not have knowledge of any fact rendering the grant of the standard security by Nova Scotia a breach of an obligation on it affecting the property.

Form of the Security

The Liquidator argued that the security, which had been drafted by Mr Liu himself, was not valid pointing to the fact that although the deed referred to a separate personal bond (per a Form B security under the Conveyancing and Feudal Reform (Scotland) Act 1970) it failed to specify the date of the personal bond and did not include anything allowing the personal bond to be identified. Also, although the deed contained the rate of interest to be applied (per a Form A security under the 1970 Act), the personal bond did not.

However, Lord Glennie agreed with the argument that it was acceptable to rely on extraneous evidence to identify the personal bond approving the arguments put on behalf of Mr Liu to the effect that, although a standard security must comply with one of the statutory forms contained in the 1970 Act, it is sufficient compliance that the deed complies “as closely as may be” and some latitude may be allowed.

Lord Glennie noted that in effect the security had been a hybrid between Form A and Form B but found there was no difficulty in a security granted in hybrid form.

The full judgement is available from Scottish Courts here.

(See Inner House decision here and appeal to the Supreme court here).

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