MacDonald v Carnbroe Estates Ltd
| Jurisdiction | Scotland |
| Judge | Lord Sales,Lord Reed of Allermuir DPSC,Lord Wilson of Culworth,Lord Briggs of Westbourne,Lord Hodge |
| Judgment Date | 04 December 2019 |
| Neutral Citation | [2019] UKSC 57 |
| Date | 04 December 2019 |
| Docket Number | No 2 |
| Year | 2019 |
| Court | Supreme Court (Scotland) |
[2019] UKSC 57
Lord Reed of Allermuir DPSC, Lord Wilson of Culworth, Lord Hodge, Lord Briggs of Westbourne and Lord Sales
Company — Liquidation — Gratuitous alienation — Property sold for substantial undervalue — Relevance of financial circumstances of insolvent company selling property at undervalue — Whether adequate consideration — Insolvency Act 1986 (cap 45), sec 242(4)
Company — Liquidation — Gratuitous alienation — Remedies — Discretion of court to grant remedy of reduction — Insolvency Act 1986 (cap 45), sec 242(4)
The Insolvency Act 1986 (cap 45) (‘the 1986 Act’), sec 242(1), provides that, when the winding up of a company has commenced, an alienation of its property may be challengeable by the liquidator or by a creditor in certain circumstances. Section 242(4) 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 difficulty. The sale was necessary in order to prevent a standard security over the site being called up by the company's heritable creditor. The premises were sold for £550,000 without being put on the open market. At the time of the sale, the open market value of the site, assuming a proper period of marketing, was between £740,000 and £820,000. The respondents were appointed as joint liquidators and sought reduction of the disposition as a gratuitous alienation within the meaning of sec 242 of the 1986 Act.
At first instance, the commercial judge held that the sale price was adequate consideration, in view of the company's perilous financial position and the need for a quick sale. The respondents reclaimed. The Inner House allowed the reclaiming motion and held that the achievement of a quick sale would not have saved the company's business. An entity which was insolvent owed a fiduciary duty to its creditors, and, as a result, required to obtain full consideration for property alienated. Where a business was about to come to an end, there was no need to maintain liquidity and the interests of creditors were paramount. The appellant appealed to the UK Supreme Court.
The appellant argued that: (i) the central issue had been whether the company's financial distress justified an urgent sale and that the Inner House had erred in interfering with the Lord Ordinary's findings at first instance by requiring too strict an approach to the question of departure from open market value; (ii) the test of adequate consideration required analysis of whether the transaction was satisfactory in all the circumstances, including the facilitation of commercial transactions and certainty, rather than taking an overly strict approach; and (iii) the approach of the Inner House had failed to take account of the commercial reality that a purchaser of property from a distressed company could not know whether that company had a realistic prospect of preserving its business.
In relation to the power contained in sec 242(4) of the 1986 Act to grant a remedy in cases of gratuitous alienation, the appellant contended that an interpretation of the provision which gave the court no discretion but to order reduction of a disposition could give rise to anomalous and unjust results. The respondents contended that the absence of a discretion was supported by the relevant provisions of the Insolvency (Scotland) Rules 1986 (SI 1986/1915) and the Scottish Parliament's intention in re-enacting the provisions of sec 242 of the 1986 Act as sec 98(5) of the Bankruptcy (Scotland) Act 2016 (asp 21) in respect of personal insolvency.
Held that: (1) adequate consideration meant the giving of consideration which might objectively be described as reasonable had the transaction taken place between the parties acting at arm's length in the circumstances including, in an appropriate case, the seller's need to obtain a prompt sale to protect its cash flow in a liquidity crisis, but that where there was no question of a sale to preserve liquidity, adequate consideration was to be measured by the standard which would be imposed upon an insolvency practitioner or holder of a standard security in disposing of the property (paras 31–34, 39); (2) in the present case, the company's financial circumstances at the time of sale were such that the sale constituted an informal winding up of the business and there was accordingly no justification for the sale of the property at so far below market value on the ground of urgency, absent evidence that the sum obtained was one which a liquidator or holder of a standard security would have achieved following deduction of expenses and costs (paras 40, 42); (3) the language of sec 242 of the 1986 Act was broad enough in an appropriate case where justice required it to devise a remedy to protect a bona fide purchaser of property from a reversal of its purchase which would otherwise give the creditors of the insolvent entity a substantial windfall at the purchaser's expense, and in the circumstances of the case it would be necessary to afford the Inner House an opportunity to consider whether it would be appropriate to qualify the remedy of reduction to take account of all or part of the consideration paid by the appellant for the site (paras 63, 69); and appeal allowed to the extent of remitting the case to the Inner House to consider the appropriate remedy under sec 242(4).
Lafferty Construction Ltd v McCombe 1994 SLT 858 and Kerr v Aitken[2000] BPIR 278considered and Short's Tr v Chung (No 1)1991 SLT 472 and Cay's Tr v Cay1998 SC 780disapproved.
Abram Steamship Co Ltd and the Liquidator v Abram 1925 SLT 243; 21 Ll L Rep 167
Accountant in Bankruptcy v Walker [2017] CSOH 78; 2017 SLT 890; [2017] BPIR 803
Baillie Marshall Ltd (in liquidation) v Avian Communications Ltd 2002 SLT 189
Bank of Scotland v RW Forsyth Ltd 1988 SC 245; 1988 SLT 690; 1988 SCLR 487; 4 BCC 457
Barras v Aberdeen Steam Trawling and Fishing Co Ltd 1933 SC (HL) 21; 1933 SLT 338; [1933] AC 402; [1933] All ER Rep 52; 45 Ll L Rep 199
Boyd and Forrest v Glasgow and South-Western Rly 1915 SC (HL) 20; 1915 1 SLT 114; [1915] AC 526
Cay's Tr v Cay 1998 SC 780; 1999 SLT 321; 1998 SCLR 456
Charnley Davies Ltd (No 2) (Re) [1990] BCC 605; [1990] BCLC 760; Financial Times, 15 June 1990
Farrell v Alexander [1977] AC 59; [1976] 3 WLR 145; [1976] 2 All ER 721; 32 P & CR 292; 120 SJ 451
Glencairn (Earl of) v Birsbane (1677) Mor 1011
Gorrie's Tr v Gorrie (1890) 17 R 1051
Hague v Nam Tai Electronics Inc [2008] UKPC 13; [2008] BCC 295; [2008] BPIR 363; [2008] PNLR 27
Haigh v Charles W Ireland Ltd 1974 SC (HL) 1; 1974 SLT 34; [1974] 1 WLR 43; [1973] 3 All ER 1137; 15 KIR 283; 117 SJ 939; The Times, 23 November 1973
Harrison (Raymond) & Co's Tr v North West Securities Ltd 1989 SLT 718
Johnston's Tr v Baird [2012] CSOH 117; 2012 GWD 25–514
Kerr v Aitken sub nom Aitken's Tr v Aitken [2000] BPIR 278; 1999 GWD 39–1898
Lafferty Construction Ltd v McCombe 1994 SLT 858
McCowan v Wright (1852) 14 D 968
McCowan v Wright (1853) 15 D 494
MacMillan v T Leith Developments Ltd [2017] CSIH 23; 2017 SC 642; 2017 SLT 415; 2017 SCLR 477
Miller's Tr v Shield (1862) 24 D 821
Oldham v Kyrris [2003] EWCA Civ 1506; [2004] BCC 111; [2004] 1 BCLC 305; [2004] BPIR 165; [2004] PNLR 18; (2003) 100 (48) LSG 17; 147 SJLB 1306; [2003] NPC 133; The Times, 7 November 2003
R (on the application of Belhaj) v Director of Public Prosecutions (No 1) [2018] UKSC 33; [2019] AC 593; [2018] 3 WLR 435; [2018] 4 All ER 561; [2018] 2 Cr App R 33; [2018] Crim LR 1012; The Times, 17 July 2018
R (on the application of N) v Lewisham London Borough Council [2014] UKSC 62; [2015] AC 1259; [2014] 3 WLR 1548; [2015] 1 All ER 783; [2015] HLR 6; [2014] BLGR 842; [2015] 1 P & CR 13; (2014) 158 (45) SJLB 37; The Times, 1 December 2014
Rae (John E) (Electrical Services) Linlithgow Ltd v Lord Advocate 1994 SLT 788
Short's Tr v Chung (No 1) 1991 SLT 472; 1991 SCLR 629
Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409; [2004] 1 WLR 997; [2004] 4 All ER 484; [2003] BCC 1002; [2004] 1 BCLC 359; [2003] BPIR 1429; [2003] 3 EGLR 49; [2003] 50 EG 96; [2003] 44 EG 168 (CS); 100 (44) LSG 33; [2003] NPC 121; [2004] 1 P & CR DG6; The Times, 7 October 2003
Spence v Crawford 1939 SC (HL) 52; 1939 SLT 305; [1939] 3 All ER 271
Tennant v Miller (1897) 4 SLT 318
Thomas v Thomson (1866) 5 M 198
West Mercia Safetywear Ltd (Liquidator of) v Dodd (1988) 4 BCC 30; [1988] BCLC 250; [1988] PCC 212
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 defender 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 defender. The pursuers reclaimed.
The reclaiming motion called before the First Division (the Lord President (Carloway), Lord Drummond Young and Lord Malcolm) for a hearing on the summar roll,...
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