Supreme Court: courts have discretion as to remedy for gratuitous alienation (MacDonald v Carnbroe Estates)

Supreme Court: courts have discretion as to remedy for gratuitous alienation (MacDonald v Carnbroe Estates)

Susan Ower, advocate at Axiom Advocates, examines the Supreme Court's decision that there could be no justification for an off-market sale to the appellant of an insolvent company's property, at a price far below the market value, as part of an informal winding-up. However, the court considered that although the sale had not been for adequate consideration, within the meaning of section 242(4)(b) of the Insolvency Act 1986 (IA 1986) (gratuitous alienation in Scotland, akin to a transfer at an undervalue under IA 1986, s 238), annulment of the transfer might produce a harsh and disproportionate effect. The courts could, in appropriate cases, devise a remedy to protect a bona fide purchaser. The case was therefore sent back to the Inner House to determine the appropriate remedy.

What are the practical implications of the judgment?

The practical effect in relation to the present case itself will not be known until the issue is considered again by the Inner House.

However, more generally, the decision of the Supreme Court does mean that Scottish courts have a much wider discretion to determine the appropriate redress in a case where there has been a gratuitous alienation within the meaning of IA 1986, s 242. The Scottish courts will also have a wider discretion under the equivalent provisions in relation to personal insolvency.

The case is unlikely to materially impact upon English cases where there has been a transaction at an undervalue within the meaning of IA 1986, s 238, since that provision already affords the English courts a wide discretion.

What was the background?

The respondents were the joint liquidators of an insolvent company whose principal asset and place of business had been sold to the appellant for what they claimed was an inadquate consideration.

The company's property had been valued in March 2013 at £1.2m on the open market with the valuation falling to £800,000 if one were to assume a restricted marketing period of 180 days.

In May 2014, the appellant had intimated through its solicitors an interest in purchasing the property for £950,000, and another company later expressed an interest in acquiring it for £900,000.

However, in June 2014, the company's two shareholders chose instead to sell the company. At that time, it owed more than £500,000 to HM Revenue and Customs (HMRC) and a similar amount to a bank, which together were its principal creditors. The bank held a standard security over the property in respect of a LIBOR loan. It also held a bond and floating charge over the company’s property and undertaking.

In July 2014, the company's new owner sold the property off-market to the appellant for £550,000, a price which was said to reflect he mortgage arrears and the risk that the property would be repossessed. However, the appellant did not pay the £550,000 but instead repaid the bank loan and obtained a discharge of the standard security over the property. Two years later it paid the balance to the company.

The sale of the property and the repayment of the loan left the other principal creditor, HMRC, unpaid. HMRC wrote to the company requiring payment of the tax that was due. When there was no payment, HMRC presented a petition, founding on that debt, for winding up the company. The respondents were appointed as joint liquidators and raised the present proceedings.

The question which became of central importance was whether there was an objective justification for an urgent off-market sale, which caused so radical a reduction in the value of the property in comparison with the open market value.

At first instance, the Lord Ordinary held that the sale had been made for adequate consideration, but the Inner House held that the transfer of the property ought to be reduced.

What did the Supreme Court decide?

The Supreme Court determined that the Inner House was correct to hold that the appellant had failed to establish that the property had been sold for adequate consideration. That would have been sufficient to dispose of the appeal, had the question of the appropriate remedy to be granted not arisen in debate before the court.

In relation to that question, the court held that, contrary to the decisions of the Scottish courts in Short's Trustee v Chung 1991 SLT 472 and Cay's Trustee v Cay 1998 SC 780, a court faced with an application in terms of IA 1986, s 242 has a discretion as to the remedy to be granted where it finds that a transfer of property constituted a gratuitous alienation. The words of the statute ('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') did not require the court to make an order for restoration of the property to the company which would leave the transferee to prove in competition with other creditors of the company for the price paid by it for the property. Such an order would be harsh on the transferee and also give the general body of creditors an uncovenanted windfall, since the company would not have been in receipt of the monies paid by way of purchase price, but for the impugned sale. The words of the statute were broad enough to allow the court to take account of the consideration which a bona fide purchaser paid the insolvent in devising an appropriate remedy.

Case details

  • Court: Supreme Court  
  • Judges: Lord Hodge, Lord Reed, Lord Wilson, Lord Briggs and Lord Sales  
  • Date: 4 December 2019

Susan Ower appeared with Kenneth McBrearty QC for the respondent liquidators in this case.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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About the author:

Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.