Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 117
A637/10	OPINION OF LORD UIST in the cause (FIRST) GORDON MALCOLM MacLURE AS TRUSTEE ON THE SEQUESTRATED ESTATE OF DAVID JOHNSTON; AND (SECOND) CAPELRIG LIMITED Pursuers against ANDREW BAIRD Defender ­­­­­­­­­­­­­­­­­________________

Pursuers: Bartos; Aitken Nairn WS

Defender: Barne; Drummond Miller LLP

10 July 2012

Introduction

[1] The first pursuer is the trustee on the sequestrated estates of David Johnston ("the debtor"), who was sequestrated on 30 December 2009. The second pursuers were granted decree against the debtor at Stonehaven Sheriff Court on 15 October 2009 for payment to them by the debtor of the sum of £1,208,059.93. That decree was extracted on 7 December 2009 and the sum due under it remained unpaid as at the date of sequestration. In this action the pursuers conclude for payment by the defender to the first pursuer of the sum of £173,251.11 with interest at the rate of 8% per annum from the date of citation until payment. The sum sued for represents the amount transferred by the debtor's solicitors, acting on his behalf and in accordance with his instructions, to the defender on or about 27 June 2008. That transfer is challenged by the pursuers under section 34 of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act").

[2] The action called before me on the procedure roll for debate on the pursuers' second plea in law (that the defender's averments being irrelevant and lacking in specification should be excluded from probation) and the defender's first plea in law (that the pursuers' averments being irrelevant and lacking in specification, the action should be dismissed).

The factual background
[3] The factual background, as set out in the pleadings, is briefly as follows. The debtor and the defender began cohabiting in December 1994 at the defender's flat in Aberdeen and considered themselves to be a couple. They decided that they wished to purchase a property jointly (that is, so that each had a one half pro indiviso share) but at that time it was difficult for same sex couples to obtain a joint mortgage. The defender was working as a petrol station manager and was applying to study nursing. The debtor was an accountant. It was therefore decided that, in order to facilitate the obtaining of a mortgage by the debtor, title to their first property would be taken in name of the debtor alone. On 8 May 1998 they purchased the property at 25 Cassie Close, Cove Bay, Aberdeen. On 30 November 1999 they signed a document entitled "Living Together Agreement dated 30 November" ("the 1999 agreement"). This stated that: (i) it was agreed that if the relationship ended both had a 50% share in the Cassie Close property; (ii) both had a 50% share in the Anfi Beach Club timeshare that they had recently purchased and that any future purchases of property would work on the same basis; (iii) if their relationship ended 50% of the monetary value of the debtor's life assurance or pension policies would be paid to the defender. Throughout their relationship together the defender contributed to the mortgage, other household bills and upkeep and maintenance of the properties in which they lived. In 2001 they decided to purchase a larger property at 46 Loirston Manor, Cove Bay, Aberdeen ("the property"). They decided to retain the existing mortgage in the debtor's sole name with the Royal Bank of Scotland as they were advised that it was still difficult for same sex couples to obtain a joint mortgage. On 9 February 2001 they entered into an agreement ("the Cohabitation Agreement"). In that agreement the debtor was designed as the first party and the defender as the second party, and the property at 46 Loirston Manor was designed as their home. Clause 1 provided as follows:

"1.1 The home is a property purchased in the sole name of the first party for convenience.

1.2 The parties agree that the home shall be owned by the parties in equal shares."

Clause 6 provided that the agreement would terminate in the event of the death or marriage of either party or their separation. Clause 7.1 provided that, in the event of termination other than as a result of the death of either party, the home would be sold and the proceeds divided between the parties in the proportions provided in Clause 1. Clause 8 provided as follows:

"In the event of termination as a result of the death of either party, the following transitional provisions shall apply.

In the event of this agreement being terminated as a result of the death of the first party, unless otherwise provided in a will, the second party shall have the right to remain living in the home for three calendar months from the date of such death and shall vacate the home upon the expiry of the third calendar month to enable the home to be dealt with by the first party's personal representatives as they shall see fit."

[4] The defender avers that the effect of Clause 1 of the Cohabitation Agreement is that the debtor held a one half pro indiviso share of the property in trust on behalf of the defender. He goes on to aver that, if the Cohabitation Agreement did not create such a trust, it created for him personal (contractual) rights in relation to the property such that he would be entitled to payment of half of the net free proceeds on any subsequent sale. He also avers that in 2000 he loaned to the debtor £30,000 which had been given to him by his grandparents and that the loan was recorded in the loan agreement dated 24 January 2000 ("the loan agreement"). Both the Cohabitation Agreement and the loan agreement were drawn up by a now deceased solicitor who was a friend of the defender's family. In April 2008 the debtor and the defender decided to end their relationship and as a result the property required to be sold. Due to the rising property market it had increased in value when it came to be sold. The sum transferred to the defender reflected (1) his share of the proceeds of the sale of the property; (2) the repayment of the £30,000 loan; (3) consideration in relation to two timeshares which had been jointly purchased and the sole interest in which became that of the debtor; and (4) 50% of the monetary value of the debtor's pension policies in relation to which the defender had a claim by virtue of the 1999 and 2001 agreements. The property sold for £280,000. The net free proceeds of sale were £211,825.67, of which the defender was entitled to one half, namely, £105,912.83. The following were added to this sum from the debtors share of the net free proceeds: £30,000 in relation to the loan that required to be repaid by the debtor; the cash equivalent of half of the debtor's pension entitlement at the time (£20,000 being approximately half of the debtor's accrued pension rights); and a sum of £10,000 representing approximately half of the value of two timeshares jointly owned by the debtor and the defender (the first being a timeshare at the Anfi Beach Club, Gran Canaria and the second being of a classic suite at The Edinburgh Residence). The final amount of £173,226.55 transferred to the defender also reflected (i) a sum of £7,313.72 in relation to legal fees paid on the defender's behalf by the debtor in respect of fees that were to be incurred by the defender in purchasing a new house at Plot 36 Kirkside, Laurencekirk, and (ii) the sum of £24.56, which was an overpayment and which was repaid by the defender to the debtor. Against the payment made in relation to legal fees the defender offset approximately £3,600 of rent due by the debtor to him between July 2008 and August 2009. The payment of £173,251.11 comprised a series of discrete transactions, principally consisting of four elements: (1) a sum that did not form part of the debtor's estate; (2) a sum that was in discharge of a prior obligation in relation to the loan agreement; (3) a sum for which the debtor received adequate consideration in the form of timeshare rights; and (4) a sum, representing adequate consideration by which the debtor discharged the defender's claim under the 1999 agreement and the 2001 agreement relating to the debtor's accrued pension rights. If the sum of £105,912.83 did form part of the debtor's estate and the Cohabitation Agreement created only personal (contractual) rights in favour of the defender, that sum was paid over for adequate consideration having regard to the context of the relationship between the defender and the debtor, the 1999 agreement and the contribution made by the defender to the various properties (including the property) in relation to maintenance, upkeep, mortgage and other household bills. If any of the elements making up the sum transferred to the defender is challengeable under section 34 of the Bankruptcy (Scotland) Act 1985, the sum concluded for does not represent an appropriate restitution of the debtor's estate and the sum sued for is therefore excessive under reference to section 3 of the Human Rights Act 1998 and Article 1, Protocol 1 of the European Convention on Human Rights. Restitution of the entire sum transferred would be disproportionate.

[5] The pursuers aver that the transfer was completed no earlier than two years before the date of sequestration and is therefore challengeable by them under section 34 of the 1985 Act. The transfer is prejudicial to the interest of the debtor's creditors, including the second pursuers. The defender has failed to demonstrate that the transfer was made for adequate consideration and has used some of the sum transferred to purchase a property in his name in Laurencekirk.

The relevant statutory provisions
[6] Section 34 of the 1985 Act, so far as relevant, provides as follows:

"34 - (1) Where this subsection applies, and alienation by a debtor shall be challengeable by -

(a) any creditor who is a creditor by virtue of a debt incurred on or before the date of sequestration, or before the granting of the trust deed or the debtor's death, as the case may be: or

(b) the trustee, the trustee acting under the trust deed or the judicial factor, as the case may be.

(2) Subsection (1) above applies where -

(a) by the alienation, whether before or after the coming into force of this section, any of the debtor's property has been transferred or any claim or right of the debtor has been discharged or renounced; and

(b) any of the following has occurred -

(i) his estate has been sequestrated (other than, in the case of a natural person, after his death; ...and

(c) the alienation took place on a relevant day.

(3) For the purposes of paragraph (c) of subsection (2) above, the day on which an alienation took place shall be the day on which the alienation became completely effectual; and in that paragraph 'relevant day' means, if the alienation has the effect of favouring -

(a) a person who is an associate of the debtor, a day not earlier than five years before the date of sequestration...; or

(b) any other person, a day not earlier than two years before the said date.

(4) On a challenge being brought under subsection (1) above, the court shall grant decree of reduction or for such restoration of property to the debtor's estate 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 -

(a) that immediately, or at any other time, after the alienation the debtor's assets were greater than his liabilities; or

(b) that the alienation was made for adequate consideration;...

Provided that this subsection shall be without prejudice to any right or interest acquired in good faith and for value from or through the transferee in the alienation.

(6) For the purposes of the foregoing provisions of this section, an alienation in implementation of a prior obligation shall be deemed to be one for which there was no consideration or no adequate consideration to the extent that the prior obligation was undertaken for no consideration or no adequate consideration."

Whether there was a trust

[7] The first issue addressed in argument at the debate related to the averment made by the defender in answer 2 at page 12 D that the effect of clause 1 of the Cohabitation Agreement was that the debtor held a one half pro indiviso share of the property in trust on behalf of the defender. It was submitted for the pursuers that that averment was irrelevant as on a proper construction of the Cohabitation Agreement its terms were inconsistent with the establishment of a trust in favour of the defender of the half share of the property and irrevocable divestiture of the debtor from his beneficial interest in that half share and in investiture of the defender. The Cohabitation Agreement was a mere contract. In Clark Taylor and Co Limited and Quality Site Development (Edinburgh) Limited 1981 SC 111 Lord President Emslie, having reviewed the authorities, stated as follows at page 118:

"The result of this analysis of the ruling authorities is that in order to complete the successful constitution of a trust recognised as such by our law, where the truster and trustee are the same persons, there must be in existence an asset, be it corporeal or incorporeal or even a right to future acquirenda; there must be a dedication of the asset or right to defined trust purposes; there must be a beneficiary or beneficiaries with defined rights in the trust estate; and there must also be delivery of the trust deed or subject of the trust or a sufficient and satisfactory equivalent to delivery, so as to achieve irrevocable divestiture of the truster and investiture of the trustee in the trust estate. ... an obligation to 'hold in trust' implies that there will be a fund, a trust deed, a divestiture by the truster and an investiture of a trustee."

[8] It was submitted for the pursuers that in the present case there was no dedication of the asset to defined trust purposes and no delivery of the trust deed or subject of the trust or a sufficient or satisfactory equivalent to delivery, so as to achieve irrevocable divestiture of the truster and investiture of the trustee in the trust estate. In Heritable Reversionary Co Ltd v Millar (1892) 9 R (HL) 43 there was no dispute about the creation of a trust and that case was therefore not in point. In Accountant in Bankruptcy v Mackay 2004 SLT 777 a trust had been created from the outset by virtue of the disposition to the debtor. Similarly, in Hamilton v Ford [2007] CSOH 15 there was a trust from the beginning when the property was put in the name of the first defender. These three cases were therefore distinguishable from the present one.

[9] The question in this case was whether clause 1.2 of the Cohabitation Agreement effected a dedication of a one half pro indiviso share of the property for defender trust purposes in favour of the defender a beneficiary. It was necessary to look at the Cohabitation Agreement as a whole. The opening words "now it is agreed" did not indicate the creation of a trust. The words "shall be" seemed to indicate some statement of intent for the future rather than divesting the debtor of a half share of the property, even in trust. There was no mention of a half share of the property being held by the debtor as a trustee, as a nominee or even simply holding it for behoof of the defender. It was accepted that the Cohabitation Agreement gave the defender personal rights enforceable against the debtor. Clause 7.1 consisted essentially of an obligation on the debtor to sell the property and divide the proceeds of sale on separation. On the death of the debtor the defender would receive nothing unless it was otherwise provided in a will by the debtor. The provision about the will was quite inconsistent with any intention by the debtor to form an irrevocable trust. Clauses 7 and 8 were quite inconsistent with any construction of clause 1.2 as a declaration of trust.

[10] The question was one of construction of the Cohabitation Agreement and whether a reasonable person would understand the parties to have meant that in terms of the agreement, particularly clause 1.2, the debtor was divesting himself of a one half pro indiviso share held by him in a personal capacity and investing himself with that share to be held in a bare trust. A bare trust existed where the trustee held property for the beneficiary simpliciter and a beneficiary could demand conveyance at any time. An example of a bare trust was to be found in Heritable Reversionary Co Ltd v Millar. We did not have that here: rather, what existed here was an agreement between the debtor and the defender regulating between themselves all aspects of their cohabitation. It was headed "Cohabitation Agreement" and the first preamble stated that the parties wished to enter into a binding legal agreement as to the ownership of property, financial and other matters during the course of cohabitation. There was nothing in terms of the Cohabitation Agreement to suggest that it was intended to regulate the relationship between, on the one hand the debtor or defender, and, on the other hand, any creditor or third party dealing with either of them. The Cohabitation Agreement did not touch upon what would happen to the assets if one party became insolvent. There were two ways of looking at clause 1.2: (1) as between themselves the parties would exercise equally the rights of owners in relation to the property and until the termination of the agreement (a construction which fitted with clauses 7 and 8); and (2) if clause 1.2 amounted to an attempt to transfer ownership it was ineffectual in doing so.

[11] In addition, there were no averments of delivery of the document or equivalent actings which would amount to irrevocable divestiture even if the Cohabitation Agreement did amount to a declaration of trust. The signature of the defender to the agreement was not sufficient (Clark Taylor). The averments to the effect that the Cohabitation Agreement established a trust were irrelevant and should be deleted.

[12] It was submitted for the defender that the Heritable Revisionary Co case showed that, as a matter of Scots Law, there could be a latent, bare trust which was not disclosed on the register: in other words, even where an unqualified title was recorded or registered in the name of one person it was possible for the heritage in question to be subject to a valid trust in favour of another person. The only requirement for formal validity where a person was to declare himself the sole trustee of his own property or any property which he might acquire was a written document complying with section 2 of the Requirements of Writing (Scotland) Act 1995, section 1(2)(a)(iii). It was also clear that no particular form of words was required for a trust to be created: Wilson and Duncan on Trusts at para 2-04. In ascertaining the intention of the granter, it was legitimate to have regard to the matrix of fact to identify what the reasonable person, having regard to the relevant background information, would understand the deed to mean. In the context of a bare trust it was not surprising that the declaration of trust might be in simple form and in these situations the issue of delivery had to be considered in context: St Clair and Drummond Young, The Law of Corporate Insolvency in Scotland at paras 12-06 and 12‑09. In two cases (Accountant in Bankruptcy v Mackay and Hamilton v Ford) the constitution of a bare trust had been relevantly averred, notwithstanding phrases such as "in trust for", "for the behoof of" were not used in any formal way.

[13] The Cohabitation Agreement created in relation to a one half pro indiviso share of the home a trust in favour of the defender. The document required to be considered in the context of the facts averred by the defender. The agreement had been drawn up by a family friend who was a solicitor, but it was clear that it was not a well drafted document. In light of the first preamble the position was that, in relation to the home, the trust purposes were restricted to the period for which the relationship subsisted. It was expressly stated that the "home is a property purchased in the sole of the first party for convenience". The title position, therefore, merely reflected an administrative convenience. The true title position (that the home shall be owned by the parties in equal shares) was identified in clause 1.2. As a matter of construction clauses 1.1 and 1.2 could only mean that, although legal title was held in the debtor's name, a one half pro indiviso share was held in trust for the defender. The absence of technical language was nothing to the point: the exercise involved ascertaining the intention of granter having regard to the deed and the relevant background circumstances. The use of the word "shall" was not problematic and was not indicative of only a future intention. The fact the Cohabitation Agreement post-dated the acquisition of the home was also irrelevant. The implication of clause 1.2 was that the trust was created when the property was purchased (although it would have had to be in writing to be valid). It did not matter if the trust was created after the property was purchased. The Cohabitation Agreement did not amount to a contract to reconvey: it established beneficial ownership in equal shares. Clauses 7 and 8 supported, rather than detracted, from the trust argument. The trust purposes were restricted to the subsistence of the parties' relationship. When that relationship ended, the trust agreement simply specified how the trust property was to be dealt with. Clause 8 simply controlled the situation relating to occupation in the event that the debtor died. No provision was made in relation to the situation if the defender died. The wording "to be dealt with by the first defender's personal representatives as they shall see fit" simply related to disposal of the trust asset: it did not mean that the defender lost his beneficial interest in half of the property altogether as that interpretation would run completely counter to the whole ethos of the deed and flouted common sense. In regard to the submission for the pursuers that the Cohabitation Agreement created only personal rights, it would be a very odd contractual right if the defender's "ownership" of half of the home could be extinguished by the death of the debtor. There was no need for a specific provision to be inserted in the Cohabitation Agreement dealing with the question of insolvency.

[14] Having considered the competing submissions of parties, I have reached the conclusion that on no conceivable view could it be said that the Cohabitation Agreement established a trust granted by the debtor in favour of the defender of a one half pro indiviso share in the home. The full requirements of the test for the establishment of a trust set out by Lord President Emslie in Clark Taylor and Quality Site Development (Edinburgh) Ltd are simply not met. It is notable that the submission for the defender made no reference to these requirements. In my opinion the Cohabitation Agreement, properly construed, created in the defender only personal rights enforceable against the debtor. The first requirement mentioned by Lord President Emslie, namely, that there must be in existence an asset, is clearly satisfied as the asset in this case was a one half pro indiviso share of the home. The second requirement, that there must be a dedication of the asset or right to defined trust purposes, is, in my opinion, not satisfied. Neither is the third requirement that there be a beneficiary with defined rights in the trust estate nor the fourth requirement, that there must be delivery of the trust deed or subject of the trust or a sufficient and satisfactory equivalent to delivery, so as to achieve irrevocably divestiture of the truster and investiture of the trustee in the trust estate. While it may be arguable that the signature of the defender on the Cohabitation Agreement amounted to a satisfactory equivalent to delivery, I fail to see how irrevocable divestiture of the truster and investiture of the trustee in the trust estate could be said to have been achieved. Neither party made reference to clause 10 of the Cohabitation Agreement, which provides that it may only be varied or amended if recorded in a supplemental agreement executed by both parties. There was therefore nothing irrevocable about clause 1.2. I am accordingly of the opinion that the averments of the defender about the establishment of a trust are irrelevant and must be deleted.

Adequate consideration

[15] The defender requires to aver and prove that, in terms of section 34(4)(b) of the 1985 Act, the alienation of the sum of £173,251.11 by the debtor was made for adequate consideration.

[16] The submission for the pursuers was that adequate consideration meant the receipt in exchange by the debtor of a right of material patrimonial value which might be vindicated in a court of law and which would be reasonable had the transfer taken place between parties acting at arms length in ordinary commercial circumstances: Cay's Trustee v Cay 1998 SC 780 at page 786G and Aitken's Trustee v Aitken (Unreported, 26 November 1999, Lord Eassie). In addition an alienation by the debtor in implement of a prior obligation was deemed to be for no consideration or inadequate consideration to the extent that the prior obligation was undertaken for no or inadequate consideration: section 34(6) of the 1985 Act.

[17] The question of what amounted to consideration had been considered in a number of cases. There were certain essential features. These were as follows:

(1) It involved something given or surrendered in return for something else.

(2) If something was given without any return being demanded or expected or obtained and at the time of giving was not intended to be regarded as a consideration of some past, present or future return it could not be a consideration.

(3) Consideration acquired its character no later than the time that the giving or surrendering took place.

(4) The thing which amounted to consideration had to be of material or patrimonial value and capable of vindication in a legal process.

The above propositions were founded on what was said in the opinion of the court in MacFadyen's Trustees v MacFadyen 1994 SC 416 at page 421E.

[18] The consideration also had to be adequate. In Lafferty Construction Ltd v McCombe 1994 SLT 858 Lord Cullen stated at page 861C-D:

"In considering whether alienation was made for 'adequate consideration', I do not take the view that it is necessary for the defender to establish that the consideration for the alienation was the best which could have been obtained in the circumstances. On the other hand, the expression 'adequate' implies the application of an objective standpoint. The consideration should be not less than would reasonably be expected in the circumstances, assuming that persons in the position of the parties were acting in good faith and at arms length from each other."

In Aitken's Trustee v Aitken Lord Eassie stated at pages 4-5:

"In my opinion the expression 'adequate consideration' means the giving of a consideration which might objectively be described as being a reasonable prestation for the property conveyed by the bankrupt to the transferee had the transaction taken place between parties acting at arms length in ordinary commercial circumstances."

Section 34(6) of the 1985 Act was important in this case so far as the distribution of the sale proceeds of the home on separation were concerned.

[19] The issue in this case was whether the defender had averred adequate consideration for the actual transfer that was made on one occasion. There were no relevant and specific averments of a consideration for the element of the transfer consisting of the difference between the sum of £105,912.83 allegedly held in trust by the debtor for the defender plus the alleged £30,000 loan repayment on the one hand and the sum of £173,251.11 which was actually transferred to the defender. In order to have a relevant defence of adequate consideration in the present case the defender would have to give fair notice of the following two matters:

(1) The thing or things of material or patrimonial value which were given or surrendered in return for, and no later than the alienation of, the sum of £67,338.25 in the event that part of the transfer was of trust property or £173,251.11 in the event that no part of the transfer was of trust property.

(2) The thing or things given or surrendered were a reasonable prestation for the alienation had it been at arms length in ordinary commercial circumstances.

[20] The defender did not satisfy these two requirements because there were no averments that anything was given or surrendered by him in return for the alienation, nor was there even an averment that the debtor made the alienation in exchange for something from the defender in return. At best for the defender were his averments at page 13D that the sum transferred "reflected" certain different sums. It was not averred when they were reflected and one could not look at the matter ex post facto. He had failed to give fair notice of what he was offering to prove had been given or surrendered in exchange for the sum of £67,338.25 and that constituted a fundamental flaw in his case. In any event there were no averments for adequate consideration of the £67,338.25 or the whole amount. The only consideration relevantly averred by the defender was repayment of the £30,000 loan. There was no fair notice of any actual transfer of the timeshare rights or the date thereof. There was no averment of any assignation or intimation thereof. There was no averment of the nature of the timeshare rights or who the creditor was. The 1999 agreement referred simply to the Grand Canaria transfer and gave an option to the parties to either transfer inter se for value or to sell. The averments about the timeshare could not amount to consideration or a part of a consideration and should be deleted. No consideration was averred for payment of the half share of the pension rights, there was no specification of who the pension providers were and a specific amount was not provided. Applying Lord Eassie's test, there were no averments of a reasonable prestation in respect of £67,338.25. That would claw back of the entire alienation: Short's Trustee v Chung 1991 SLT 472 and Cay's Trustee v Cay, supra. Section 34(6) of the 1985 Act applied to the Cohabitation Agreement and deemed that no consideration had been given for the one half share of the property. There was no averment that the 1991 obligation had been given in consideration of anything of patrimonial value.

[21] The defender averred that section 34(6) of the 1985 Act was inconsistent with Article 1 of Protocol 1 of the European Convention on Human Rights, but the decisions in Short's Trustee and Cay's Trustee were consistent with that provision. Reference was made to Axa General Insurance Ltd, Petitioners 2011 SLT 1061, per Lord Reed at paras 107, 108, 124, 126 and 131. It was accepted by the pursuers that in the present case there was a deprivation of property by virtue of section 34(6). The aim of that provision was to prevent debtors prejudicing the whole body of creditors, and, in particular, their unsecured creditors, by putting property out of their reach when their estate was subsequently sequestrated for the benefit of the body of creditors as a whole. A further aim was to secure equal treatment for all unsecured creditors dealing with the debtor in the specified period before sequestration. These were legitimate aims which struck a balance between the interests of creditors and those of the transferee. Section 34(4) allowed in exchange for restoration of the debtor's estate a claim for recompense for unjustified enrichment to be made by the transferee in the sequestration, and there was therefore no absolute deprivation without compensation. To not require a full return would reduce the deterrent effect of the provision and potentially encourage the making of transfers for inadequate consideration. It would also give the transferee a preference over unsecured creditors who might have given full consideration which they could not recover because of the sequestration. It could not be said that the balance struck by section 34(4) between the interests of the creditors as a whole and those of the transferee was disproportionate. The striking of the balance was a matter of economic policy best left to the legislature and a wide margin of appreciation should be accorded to the scheme in section 34(4). As authoritatively interpreted in Short's Trustee and Cay's Trustee, section 34(4) was compatible with Article 1 of Protocol 1. Section 3(1) of the Human Rights Act 1998 did not alter the established interpretation of section 34(4). The averments based on Article 1 of Protocol 1 should be deleted.

[22] It was submitted for the defender that, in terms of his primary position, the question of adequate consideration related only to the balance transferred. There were two questions - (1) Was there consideration? (2) Was it adequate? The defender accepted the formulation of consideration set out in MacFadyen at page 421. In the present case the defender set out clear averments about three distinct transactions: (a) the discharge of a loan, for which the consideration was £30,000; (b) the transfer to the debtor by the defender of the defender's timeshare rights, for which the consideration was £10,000. It was averred that the timeshares were owned jointly and that the sole interest in the timeshares became that of the debtor. In context, it was clear from the averments that this transfer took place as a result of the consideration. (c) the discharge of the defender's claims to the debtor's accrued pension for a consideration of £20,000. In each respect the defender had averred a relevant case of adequate consideration. There was no obligation on him to identify precise values and to aver that the precise value was paid. In his averments he set out the nature of the consideration and the adequacy of the consideration and he averred that the fact that these constituted discrete transactions and he then characterised each of the discrete transactions under reference to the language of section 34. The word "reflected" was simply intended to mean the same as "comprise": the defender was identifying with precision how the final amount transferred was made up. The defender's position was that, if no trust had been created, then the right to receive half the proceeds was undertaken for adequate consideration. Adequate consideration required to be assessed at the time the obligation was entered into: Nova Glaze Replacement Windows Ltd v Clark Thomson & Co 2001 SC 815 at para [12]. It might be difficult to put a value on what was "adequate": Cay's Trustee at page 786I. As a result of the 2001 Agreement both parties had reciprocal rights in relation to property brought into the relationship by the other party and also had obligations in relation to living expenses, including the mortgage payments. The defender also had rights under the 1999 agreement to half of the proceeds of sale of the property then owned. In view of the reciprocal nature of the rights and obligations entered into under the Cohabitation Agreement, a relevant alternative case had been made out that the obligation to make payment of half of the free proceeds was undertaken for adequate consideration.

[23] So far remedy was concerned, section 34(4) of the 1985 Act provided that, on a challenge being brought under section 34(1), "the court shall grant decree of reduction or for such restoration of property to the debtor's estate or other redress as may be appropriate". The pursuers did not seek decree of reduction, but restoration of property to the debtor's estate or other redress. The wording of section 34(4) did not require the court to treat the transfer of £173,251.11 as a single alienation which had to be returned or not returned to the debtor's estate. The provision allowed restoration of property or other redress, which permitted the court to examine the nature of the transaction and where, as here it was a composite transaction the court could reflect that in the order given. For instance, if there were no doubt that the home was held in trust, it could not be the case that the court would be required to order return of £173,251.11 even if he could not make out relevant defence in relation to the difference between £105,912.83 and that sum. The court could examine a transfer of funds to identify to what extent, if any, the composite transaction were not for adequate consideration. Such an approach was in line with the wording of the statute and with the decisions in Short's Trustee and Cay's Trustee. In Short's Trustee the remedy of reduction was available in respect of a single, indivisible transaction. The defender in the present case was not seeking to advance an equitable set off argument, which was the case in Short's Trustee. (Ultimately, the remedy of reduction was not the appropriate remedy for the trustee in Short's Trustee.) In Cay's Trustee it was important to identify the background as set out at page 782 C-E, 782 I-783 B and 785‑D. The parties and the court treated the transfer of the funds as a single alienation and, as it was found to have been made for inadequate consideration, the alienation was reversed.

[24] The above approach was supported by an application of section 3 of the Human Rights Act 1998 to section 34 of the 1985 Act, having regard to the defender's rights under Article 1 of Protocol 1. The interpretation advanced by the pursuers would have a disproportionate effect on the defender's property rights and would amount to a deprivation of property without compensation. It was important to recall that the purpose of the bankruptcy legislation was to preserve the debtor's estate for the benefit of creditors. It was not correct to state that the pursuers' approach treated the defender like other creditors as no other creditor who had received money under, say, a loan contract from the debtor would be asked to repay the money if the money had been repaid before bankruptcy and other creditors would be entitled to a balancing of accounts (the submission put before the court on this point in Cay's Trustee being incorrect: see the speech of Lord Hope of Craighead of Melville Dundas Ltd v George Wimpy UK Ltd 2007 SC 116.) The wide reaching effects of section 3 of the Human Rights Act were pointed out by the House of Lords in Ghaidan v Gordin-Mendoza [2004] 2 AC 557.

[25] In response to the above submission for the defender it was submitted on behalf of the pursuers that there was no averment that what occurred here was a series of separate alienations with adequate consideration given in respect of each. One could conceive of such a situation, but that was not the way in which the defender's case was averred on record. The focus had to be not on transactions, but on alienations. The defender's pleading did not offer to prove a series of separate alienations with adequate consideration given for each. It was important that the defender should give fair notice of what the consideration was and the figure which he offered to prove as its value. It was accepted that valuation was not an exact science, but presumably the defender would have evidence of an estimated value which he was offering to prove. The defender required to give fair notice of the consideration given and its value. For example, no notice whatever was given of what the defender offered to prove was the value of, or any consideration given for, the obligation on the debtor to pay one half of the sale proceeds on separation. Accordingly, at a proof the court could not consider the adequacy of the consideration given for that particular obligation: Lafferty at p 861F.

[26] In my opinion it is appropriate to treat the transfer of the sum of £173,251.11 from the debtor to the defender as a single alienation, rather than a series of alienations. It was accepted on behalf of the defender that there was a single transfer of funds, but not a single transaction: the transfer reflected various transactions. Section 34 of the 1985 Act uses the word "alienation" and I accept the submission for the pursuers that the focus must be on that word itself. There can, in my view, be no doubt that the payment of £173,251.11 constituted "an alienation by a debtor" within the meaning of section 34(1) of the 1985 Act. I accept the submission for the pursuers that the defender does not have specific averments which would allow him to prove a consideration of more than £30,000, and that such a consideration cannot amount to "adequate consideration" under section 34(4)(b) for an alienation of £173,251.11. I also take the view that section 34(4)(b), as authoritatively interpreted in Short's Trustee and Cay's Trustee, is compatible with Article 1 of Protocol 1 of the ECHR. It must be shown that the interference with property rights complies with the principle of lawfulness and pursues a legitimate aim by means that are reasonably proportionate to the aim sought to be achieved. The Strasbourg Court accepts that a margin of appreciation must be left to the national authorities on the question whether a fair balance has been struck between the demands of the general interests of the community and the requirements of the protection of the individual's fundamental rights: Lord Reed in Axa at page 1083I, para 108. Lord Reed went on to point out that, at the domestic level, the courts require to be as circumspect as the Strasbourg Court, since social and economic policies are properly a responsibility of the legislature, and policy making of this nature is amenable to judicial scrutiny only to a limited degree: Axa at page 106 K-L, para 124. Adopting the required approach to section 34(4) in accordance with the Strasbourg jurisprudence, I conclude that it cannot be said that the provision breaches Article 1 of Protocol 1 and that the defender's averments on this point are irrelevant.

Decision

[27] In light of the view I have taken of the case I shall repel pleas-in-law 3, 4 insofar as it relates to section 34(4)(b) of the 1985 Act, and 5 for the defender, sustain plea-in-law 2 for the pursuers to the extent of deleting all averments in answer 2 and otherwise allow a proof before answer. The effect of this decision is that there will be a proof before answer on the defence of absolute insolvency under Section 34(4)(b) of the 1985 Act.