Scottish Court of Session Decisions

[1] The pursuers are a company in liquidation, together with the liquidator of the company. The liquidator was appointed initially as a provisional liquidator on 22 January 1997, which is taken as the start of the winding up procedure. The defenders are a partnership and the two partners thereof. Each of the partners formerly held office as a director of the pursuing company - "the Company" - and are averred to be "associates" within the meaning of Section 74 of the Bankruptcy (Scotland) Act 1985. The action is brought by the liquidator pursuant to Section 242 of the Insolvency Act 1986 in order to challenge certain transactions on the ground that they constitute the gratuitous alienation of the property of the Company. The transactions concern a lease of a piece of ground in Perth and the erection of a building upon it.

[2] The lease of the piece of ground, which extends to some 0.164 hectare, was granted to the Company by Perth and Kinross District Council in 1988. The lease was expressed to endure until Martinmas 2046, the annual rental being £3,500 per annum, subject to quinquennial review. Under the terms of the lease the Company was obliged to erect a building on the plot of ground. Some years later, namely on 20 July 1994, the lease was registered in the Sasine Register. An assignation of the lease by the company in favour of the defenders was also registered in the Sasine Register on the same date. The assignation was executed by the two individuals forming the partnership but was executed in their capacity as directors of the Company. The assignation was dated 1 and 8 June 1994. The consideration bore to be £2,500.

[3] Reduction of that assignation as a gratuitous alienation on the ground that the consideration expressed was inadequate is sought by the first conclusion of the summons. The defence put forward respecting that branch of the case includes averment to the effect that the assignation registered in the Sasine Register in July 1994 had been preceded by an assignation, of the same tenant's interest in the lease, granted by the Company to the defenders in August 1990. It is averred that following that assignation the defenders had taken possession of the subjects. Accordingly it is contended by the defenders that the Company assigned its interest in the lease in August 1990, that is to say, before the "relevant day" (22 January 1992) within the meaning of Section 242 of the Insolvency Act 1986.

[4] Parties are agreed that this branch of the case may only properly be disposed of after enquiry and that a proof before answer will therefore be required for that purpose.

[5] However, in the event that it should be established that the lease was validly assigned to the defenders by the earlier 1990 assignation as averred by the defenders in their pleadings, the liquidator seeks to advance what his counsel described as an esto case, namely that certain payments made by the Company for the construction of the building after the "relevant date" constituted gratuitous alienations being money expended on heritable property which would effeir to the land and hence for the benefit of the tenant under the lease and ultimately the land owner.

[6] It is accepted by the defenders that the Company did pay the building contractors for the construction of the buildings erected on the ground forming the subject of the lease. Precisely when construction began and finished is not entirely clear from the pleadings but on the defenders' averred account of matters it is said to have begun in late 1991. It is also averred by the defenders that by that time the manufacturing business of the Company had been purchased by two other directors and transferred, as part of that purchase, to another company namely Euroscot Windows Ltd. It is averred by the defenders that the construction proceeded in two phases, the first phase being completed in 1992 and the second phase "thereafter". On the basis of the annual accounts of the Company the liquidator avers that expenditure was made on the building in the years 1991-1993. The defenders for their part aver that the cost to the Company of constructing the building was £498,619. The manner and basis upon which those construction costs were incurred and paid for by the Company is explained by the defenders in these averments [Further amended Closed Record, p.16B ff], which the pursuers seek to have excluded from probation as irrelevant:

[7] In the course of his submission that the averments just quoted were irrelevant as not disclosing the presence of any adequate consideration for the making of the payments for the construction of the building, counsel for the liquidator tendered a note or schedule of his understanding of the financial arrangements disclosed in these averments and it is helpful to reproduce its substance:

"Cost of the Building as averred by the defenders	Consideration averred by the defenders
£498,619	(i) Directors' Loans	£  22,804.00
	(ii) Repayment of loan from Royal Bank of Scotland	£108,155.99
	(iii) Anticipated income from rentals: actually received	£105,999.50
	Total Consideration paid:	£236,959.49

[8] In the further course of his submissions, counsel for the pursuers referred to a number of authorities in which the concept of "adequacy" of consideration was discussed, namely, Short's Trustee v Chung 1991 S.L.T. 472; Lafferty Construction Ltd v McCombe 1994 S.L.T. 858 and my own opinion in Aitken's Trustee v Aitken (unreported, 26 November 1999). Counsel further referred to Cay's Trustee v Cay 1998 S.C. 780, particularly the passage in the opinion of the court at 786H. He submitted that, as in the Cay case, on the very arithmetic of the note which I have reproduced above, the Court should conclude without further enquiry that, while there might be consideration in the shape of an agreement to repay the loans or to remit the rental income, the arrangements averred by the defenders could not amount to an adequate consideration. In relation to the remission of the rental income, counsel further pointed to the fact that there might be no long-term security for that, were the lease to be further assigned. The Court should accordingly hold that no relevant defence had been stated as respects this "esto" branch of the case.

[9] In his response Mr Tyre, for the defenders, adverted initially to the averment (within the averments already quoted) that "by the time construction of the building commenced, in late 1991 it had been decided by the defenders' Partners, in their capacity as Partners of the defenders and also as Directors of the pursuers, that in consideration of funding the balance of the cost of construction of the building, the pursuers would receive the rental income produced by the building once complete." The verb "decided" was used because the individuals taking the decision were the same individuals doing so in their dual capacities of directors of the Company and partners of the defenders. The decision meant that, as partners, they committed the partnership to paying over the rental income to the Company which would on the figures averred result in the Company receiving rental payments or rental equivalents exceeding their capital investment within a time span of less than ten years. On that basis the consideration was potentially an adequate consideration. Adequacy of consideration had to be viewed at the time at which the parties entered into the transaction embracing the alienation and its counter prestation. In that respect counsel referred to John E. Ray (Electrical Services) Linlithgow Ltd v Lord Advocate 1994 S.L.T. 788, 791E and to the analysis of the concept of consideration contained within the opinion of the court in MacFadyen's Trustees v MacFadyen 1994 S.L.T. 1245 [also reported in 1994 S.C. 416]. Mr Tyre indicated that the reason for the particular arrangement in this case was that it produced - or had been thought to produce - advantages in terms of liability for Value Added Tax. In regard to the emphasis placed by counsel for the pursuer on the approach adopted in Cay's Trustee, counsel for the defenders submitted that while the arithmetic in the Cay case may have been simple, it did not apply in the present case in which a balance had to be weighed between the company's undertaking the finance of the construction costs and the future flow of income from the sub-tenants which it was averred would pass to it under the arrangements decided upon. It was also indicated by counsel for the defenders that he recognised that, respecting the penultimate sentence of the averments quoted in para [6] above, it was difficult to see any basis in law on which liquidation of the Company could be said to terminate its entitlement to the rental income. He considered that that averment should be construed rather as a narrative of what had in fact happened, namely that for whatever reason no payments had been made subsequent to the date of the appointment of the provisional liquidator. At all events, it was not submitted that the entitlement to receive the equivalent of the rental payments made by the tenants or sub-tenants was terminated simply by reason of the presentation of a winding-up petition and the appointment of a liquidator. A proof before answer on the whole case should therefore be allowed.

[10] In my view, it cannot be said at this stage that the averments made by the defender of a decision, taken by two individuals in their dual capacities of directors and partners creating an arrangement whereby the Company would receive the future rental income is incapable of constituting "consideration" as that term is explained and defined in MacFadyen's Trustee. Indeed, if I correctly understood counsel for the pursuer, he accepted that the averred arrangement might constitute a consideration. It may also be noted that the defenders not only aver the simple taking of a decision creating such an arrangement but also its operation - or at least partial operation - until at least August 1995.

[11] The principal thrust of the argument for the liquidator was that the consideration could not be said to be adequate and that the court could at this stage hold the consideration to be plainly inadequate. Counsel for the liquidator sought to support and demonstrate that argument by reference to the table or analysis which I have set out above. It is in my view plain that the approach adopted involves an historical examination of what has in fact been paid by the defenders to the Company, rather than an examination of the nature of the consideration undertaken by the defenders at the time at which the arrangement was decided upon. It may also be observed that if, as the defenders contend, there was an obligation upon them to pay over to the Company the rents accruing from the sub-tenants or other occupiers, the mere fact that they have failed to make those payments would not render the consideration inadequate.

[12] In my view, counsel for the defenders is correct in his submission that the adequacy of a consideration tendered for the alienation of a part of the patrimony of a Company or an individual must be judged at the time of the transaction. I respectfully agree with the views expressed by Lord Clyde in John E. Ray (Electrical Services) Linlithgow, 791E, which are to mind consistent with the approach adopted by the Inner House in MacFadyen's Trustee. I am accordingly not satisfied that approach adopted by counsel for the pursuer is necessarily sound. The promise or of an entitlement to a future rental income might well, in commercial terms, constitute an adequate consideration. Risks were no doubt inherent in any deemed decision on the part of the Company to incur the relatively immediate costs of construction in consideration of the long-term future payment of rental income. However, in my view, it would be inappropriate to endeavour to reach a decision on the question of the adequacy of the consideration, viewed through the optic of what was known and understood at the time, without enquiry. I am reinforced in that view by the practical consideration that enquiry is accepted as appropriate respecting the primary case for the liquidator and it would, I think, be more expedient not to restrict at this stage proof of averments of the whole transactions concerning, inter alia the lease, its assignation, purported assignation, the construction of the building and its funding.

[13] I shall therefore allow a proof on the whole case.