Joint Liquidators of Maclennan's Distribution Services Ltd v Carnbroe Estates Ltd
| Jurisdiction | Scotland |
| Judge | Lord Woolman |
| Judgment Date | 23 January 2018 |
| Neutral Citation | [2018] CSIH 7 |
| Date | 23 January 2018 |
| Court | Court of Session (Inner House) |
| Docket Number | No 17 |
[2018] CSIH 7
First Division
Lord Woolman
Lafferty Construction Ltd v McCombe 1994 SLT 858
MacFadyen's Tr v MacFadyen 1994 SC 416; 1994 SLT 1245
Rae (John E) (Electrical Services) Linlithgow Ltd v Lord Advocate 1994 SLT 788
Bell, GJ, Commentaries on the Laws of Scotland and on the Principles of Mercantile Jurisprudence considered in relation to Bankruptcy, Competition of Creditors, and Imprisonment for Debt (5th ed, W Blackwood, Edinburgh, 1826), ii, 182–183
Bell, GJ, Commentaries on the Laws of Scotland and on the Principles of Mercantile Jurisprudence (7th McLaren ed, T & TClark, Edinburgh, 1870), ii, 170–171
Goudy, H, A Treatise on the Law of Bankruptcy in Scotland (4th ed, T & T Clark, Edinburgh, 1914), p 47
Munro, CH, The Digest of Justinian (Cambridge University Press, Cambridge, 1904–09), p 42.8.6.11
Company — Liquidation — Gratuitous alienation — Property sold for substantial undervalue — Price reasonable for a forced sale — Whether adequate consideration — Whether relevant that it was a forced sale — Insolvency Act 1986 (cap 45), sec 242
Stewart Macdonald and Pamela Coyne, the Joint Liquidators of Grampian Maclennan's Distribution Services ltd brought an action under the commercial cause rules (Act of Sederunt (Rules of the Court of Session 1994) 1994 (SI 1994/1443 (S 69)), Ch 47) in the Court of Session against Carnbroe Estates Ltd seeking reduction of a disposition granted in favour of the defenders, on 25 July 2014, on the grounds that it was a gratuitous alienation. Following sundry procedure, the cause called before the commercial judge (Lord Woolman) for a proof before answer. At advising, on 18 January 2017, the commercial judge put the case out by order to discuss final orders ([2017] CSOH 8). At the hearing by order, on 26 January 2017, the commercial judge granted decree of absolvitor in favour of the defenders. The pursuers reclaimed.
Section 242(4) of the Insolvency Act 1986 (cap 45) provides, inter alia, “On a challenge being brought under subsection (1), the court shall grant decree of reduction or for such restoration of property to the company's assets or other redress as may be appropriate; but the court shall not grant such a decree if the person seeking to uphold the alienation establishes– … (b) that the alienation was made for adequate consideration”.
A distribution service company sold its premises shortly before entering liquidation. At the time of the sale, the company was in significant financial distress. The company had sold its vehicles and had lost a factoring facility with a finance company, and its secured lender was threatening to call up the standard security held over the premises. The premises were sold for £550,000 without being put on the open market. The company's liquidators sought reduction of the disposition as a gratuitous alienation. At the proof, the evidence of the expert surveyors was that £550,000 was reasonable in the context of a distressed or forced sale, but that the open market value was either £740,000 or £820,000.
At first instance, the commercial judge held that the sale price was adequate consideration. The commercial judge reasoned that the company had limited options, its finances were perilous, it could not afford a lengthy marketing period, and there were no other offers for the property. Further, there had been a saving of marketing costs. The liquidators reclaimed.
Held that: (1) where a company required to pay a debt (or grant security) urgently to avoid a threat to the continuation of its business, for there to be adequate consideration it was essential that the business was capable of continuing after that payment or grant (para 20); (2) a company facing liquidity problems might have to raise money rapidly by an immediate sale of assets, any such sale would be a forced sale and the consideration obtained would likely reflect that (paras 21, 22); (3) an insolvent debtor was obliged to manage their assets so as to protect the creditor's interests as a whole (rather than pay debts as they fell due), in such a case a relatively strict view should be taken of the adequacy of consideration, so that where the debtor's business had ended or was about to end or where the business could not continue following the sale the need for a quick sale to maintain liquidity would normally be irrelevant (paras 25, 26); (4) as the defender was in severe financial difficulties before the sale, was balance sheet insolvent, had arranged to sell its vehicles without which continuation in business would be extremely difficult, and was selling its premises, the inevitable inference was that there was no realistic prospect the company's business could continue (paras 27–30); (5) it followed that the consideration was inadequate (para 31); and reclaiming motion allowed and decree of reduction pronounced.
John E Rae (Electrical Services) Linlithgow Ltd v Lord Advocate 1994 SLT 788 distinguished and MacFadyen's Tr v MacFadyen1994 SC 416 and Lafferty Construction Ltd v McCombe1994 SLT 858approved.
The cause called before the First Division, comprising the Lord President (Carloway), Lord Drummond Young and Lord Malcom, for a hearing on the summar roll, on 5 October 2017.
At advising, on 23 January 2018, the opinion of the Court was delivered by Lord Drummond Young—
Opinion of the Court—
[1] The pursuers are the liquidators of Grampian Maclennan's Distribution Services Ltd (‘Grampian’). On 12 September 2014 the first pursuer was appointed provisional liquidator of Grampian, and at a meeting of creditors held on 21 November 2014 both pursuers were appointed liquidators. On 24 July 2014 Grampian had granted a disposition of heritable property at 9 Stroud Road, East Kilbride (‘the property’), in favour of the defenders for a stated consideration of £550,000. The disposition was registered in the Land Register on 25 July 2014, with title number LAN86957. Following their appointment as liquidators the pursuers raised proceedings for reduction of that disposition and an order ordaining the defenders to execute a disposition of the property in favour of the pursuers on the ground that the disposition was a gratuitous alienation falling within sec 242 of the Insolvency Act 1986 (cap 45) (‘the 1986 Act’). Following a proof, the commercial judge held that the consideration granted for the disposition was adequate in the particular circumstances in which it was granted, which is a defence under sec 242(4)(b). He therefore assoilzied the defenders from the conclusions of the summons. The pursuers have reclaimed against the commercial judge's interlocutor.
[2] Grampian's business was established in 1984. It ran a distribution service throughout Scotland and in other parts of the United Kingdom. For many years it was controlled by Mr Derek Hunter and his wife, Mrs Hazel Hunter, who held all the shares in the company; Mr Hunter was the sole director. The centre of Grampian's operations was at the property, which consisted of an industrial unit on the Kelvin Industrial Estate in East Kilbride. That property was Grampian's principal asset. It comprised a warehouse, a vehicle workshop and a yard with a gatehouse. These were situated on an area of 4.4 acres. The buildings had been constructed during the 1970s. The yard was sufficiently large that part of it could have been sold separately from the buildings. Grampian had purchased the property in August 2005 for a price of £630,000. It obtained loan facilities from the National Westminster Bank plc (‘NatWest’), and in return it granted a standard security over the property in favour of NatWest together with a bond and floating charge over its assets.
[3] In March 2013 DM Hall Chartered Surveyors LLP were instructed to provide a valuation of the property. They valued it at £1.2 million on the open market. If a restricted marketing period of 180 days were assumed, however, they indicated that that valuation would fall to £800,000. The buildings were noted as requiring maintenance and repair. By early 2014 it had become apparent that Grampian was encountering financial difficulties. In May 2014 Mr Hunter consulted an independent insolvency practitioner in order to obtain advice as to whether he should place Grampian in members’ voluntary liquidation. At that time Mr Hunter thought that if the property were sold Grampian would have sufficient assets to allow for a distribution to the shareholders after paying all sums due to creditors. That belief was supported by the valuation that had been provided by DM Hall. Nothing further occurred in May 2014.
[4] In July 2014, however, Mr and Mrs Hunter sold their entire shareholding in Grampian to Mr Kevan Quinn. Mr Quinn became the sole shareholder and director. He had discussed Grampian's problems in detail with Mr Hunter, but hoped initially that he could turn the business round and make it profitable. At that time Grampian owed in excess of £1 million to its two principal creditors, HM Revenue and Customs (‘HMRC’) and NatWest. Loan repayments of approximately £4,600 per month were due to NatWest. Shortly after Mr Quinn took over the company, it became clear to him that Grampian could not meet its obligation to pay that amount each month, and NatWest indicated that it was not prepared to support Grampian any further. No alternative source of funding was available, at least in the short term. Moreover, at approximately the same time the finance company that provided invoice finance withdrew their factoring facility and were not prepared to provide further support. This obviously created serious difficulties for Grampian's cash flow; in the witness statement that forms part of his evidence Mr Quinn stated that cash flow ‘collapsed’ at this point. Mr Quinn considered alternative funding but quickly realised that none...
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