Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION
	[2013] CSOH 189
CA26/13	OPINION OF LORD MALCOLM in the cause ALAN ALEXANDER BROWN and JOHN BRUCE CARTWRIGHT, the joint administrators of Oceancrown Limited Pursuers; against STONEGALE LIMITED Defenders: ________________

Pursuers: S Ower; Pinsent Masons LLP

Defenders: D Fairley, QC; Anderson Strathern LLP

11 December 2013

[1] In these and related proceedings the joint administrators of Oceancrown Limited and other associated companies, including Loanwell Limited and Questway Limited, seek the reduction of certain transactions as being gratuitous alienations. I heard a proof in the combined proceedings. The background circumstances can be summarised as follows. The companies in administration were part of a group controlled by Ralph Norman Pelosi (Mr Pelosi senior). He enjoyed beneficial ownership of the relevant companies. As at the date of the administration of the companies in August 2011, he was the sole director of Oceancrown Ltd, Ambercrest Ltd, Ambercroft Ltd, Lakecrown Ltd and Loanwell Ltd. He also acted as a shadow director of Questway Ltd. His son, Norman Ralph Pelosi (Mr Pelosi junior) is the sole shareholder and director of Stonegale Ltd. A secured facility in the region of £17.3 million had been made available to Oceancrown by Anglo Irish Bank (the bank), the debt subsequently being assigned by the bank to Hadrian S.à.r.l. The other companies had cross guaranteed the debt.

[2] The group was involved in the development and letting of commercial and residential properties. Mr Pelosi senior had effective control of all the companies, which were operated as one enterprise. Some 120 dwellings were let, despite being, in the words of one of the administrators, "unfit for human habitation". Six commercial properties were let to a business known as Mitchell's Hire Drive. Minimal records were kept. The various companies operated on the basis of one bank account with the Bank of Scotland in the name of Questway Limited. The administrators have found it impossible to reconcile all deposits and withdrawals from the account.

[3] The present proceedings concern certain property transfers involving Oceancrown, Loanwell, Questway, Strathcroft Ltd, Stonegale Ltd and Mr Pelosi junior, all in November 2010. At the time Strathcroft was 99% owed by Mr Pelosi senior (it became wholly owned by him). The sole nominal director of Strathcroft was Mr John Anderson. Stonegale is 100% owned by Mr Pelosi junior. Oceancrown owned a commercial property at 278 Glasgow Road, Rutherglen. Mr Pelosi senior negotiated a deal with Clyde Gateway Development Limited for the sale and purchase of that property. On 10 November 2010 Oceancrown disponed 278 Glasgow Road to Strathcroft for a consideration recorded as being £762,000. On the same day Strathcroft disponed the same property to Clyde Gateway for £2,100,000 plus VAT of £367,500. Both dispositions referred to a date of entry of 16 November 2010. In the opinion of Mr Alan Brown, who is one of the joint administrators, the purpose of structuring the deal in that way was to attempt to alienate the sum of £1,705,500 from Oceancrown Limited.

[4] From the perspective of the bank, the sale of 278 Glasgow Road was part of a wider series of property transfers which also involved 110, 210 and 260 Glasgow Road, and 64 Roslea Drive, Glasgow. The bank held standard securities over all these properties. On 19 August 2010 Mr Robert Frame solicitor of Miller Beckett and Jackson (MBJ), a firm of solicitors based in Glasgow, wrote on behalf of the sellers to the bank's solicitor (Mr James Gillespie of Messrs McClure & Naismith). The letter included details of the "relevant sale price" of the Glasgow Road properties as follows

278 Glasgow Road - £762,000

210 Glasgow Road - £934,000

260 Glasgow Road - £450,000

110 Glasgow Road - £200,000

Mr Frame stated "my clients are keen to settle as soon as possible, but accept that it may be next week before the sanction has been obtained from the bank's credit committee."

[5] On 11 November 2010 Mr Gillespie wrote to the bank in connection with the properties' release from the bank's security. He told the bank that he understood that these properties were to be sold and that discharges may be delivered "in exchange for the free proceeds of sale being remitted to you". He enclosed a table showing the following:

278 Glasgow Road - Owner - Oceancrown - sale price £762,000

210 Glasgow Road - Owner - Loanwell - £934,000

260 Glasgow Road - Owner - Oceancrown - £450,000

110 Glasgow Road - Owner - Oceancrown - £200,000

64 Roslea Drive - Owner - Questway - £68,000

[6] The purported sale price for the properties totalled £2.414 million. Mr Gillespie informed the bank that he had been "advised that the sellers' solicitor will send me the sum of £2,392,000 as free sale proceeds." He enclosed five separate discharges and asked for them to be executed and returned to him with full particulars of execution. The discharges were to be released only in exchange for the free sale proceeds for each particular property.

[7] On 16 November 2010 Mr Frame received a letter signed by Mr John Anderson on behalf of Questway stating that the letter could be accepted as authority to send to the bank the sum of £2,414,000 in respect of the purchase of the Glasgow Road properties at numbers 278, 110, 210 and 260, plus that at 64 Roslea Drive. Once the bank received the funds, the executed discharges were delivered, all as agreed between Mr Frame and Mr Gillespie. Unknown to Mr Gillespie, by then 278 had been disponed to Strathcroft and then to Clyde Gateway for almost £2.5m, not the £762,000 mentioned in the correspondence. Subsequently 210, 260 and 110 Glasgow Road were disponed to Stonegale, and 64 Roslea Drive to Mr Pelosi junior. The dispositions in respect of those subjects were executed on 24 November 2010, with a date of entry given as 16 November 2010. They recorded that the consideration for each property was as per the aforesaid table, making a total of £1,652,000. In fact no money was paid for them. The following year 64 Roslea Drive was purchased from Mr Pelosi junior by a Mr John Lazari for £125,000.

[8] As the proof progressed it became apparent that there was no dispute that the funds remitted to the bank came from the purchase price paid by Clyde Gateway to Strathcroft for 278 Glasgow Road. The administrators contend that a large proportion of the money received from Clyde Gateway was attributed to the various other dispositions in order to make it appear that the transfers to Stonegale and Mr Pelosi junior were made for consideration; the truth being that no funds were paid by either Stonegale or Mr Pelosi junior in exchange for those dispositions. In Mr Brown's words, Mr Pelosi senior structured the back‑to‑back sale and the transfers of the four other properties "solely to ensure that the sum of £1,705,500 was kept out of the reach of the bank, and to secure the transfer of those properties to Mr Pelosi junior and his company for no consideration". Mr Brown continued "no commercial reason can be given for structuring the transfers in this way". He added that his investigations indicated that the VAT element on the sale of 278 Glasgow Road had not been paid to HMRC, thus it appeared that it was included to ensure that the funds received from Clyde Gateway were sufficient to secure the release of the standard securities held by the bank in respect of all five properties. In these circumstances, in this and the related actions, the court is asked to reduce the transfers of 210, 260 and 110 Glasgow Road and 64 Roslea Drive, all on the basis that they are gratuitous alienations under and in terms of section 242 of the Act.

[9] In August 2012 the court granted interim interdict preventing any sale of the properties held by Stonegale. The defenders have produced a document which bears to be a loan agreement between Strathcroft and Stonegale to finance the purchase by Stonegale of the properties. Much of the proof was devoted to the question of whether this document is a sham. For the moment I will leave that issue to one side. On 31 July 2012 Mr Pelosi junior signed a form DSO1 seeking to have Stonegale struck off. The administrators lodged an objection to ensure that the present action could continue. Had the company been struck off, it would have forfeited ownership of the Glasgow Road properties to the Crown. Mr Brown stated that his investigations made it clear that Mr Pelosi senior dealt with the property portfolio, and that Stonegale is controlled by him.

[10] The administrators consider that the true value of 278 Glasgow Road was the sum paid by Clyde Gateway, not the sum of £762,000 mentioned in the disposition by Oceancrown to Strathcroft. The £762,000 figure was based upon a valuation of the subjects. The property had been on the market for some months. The reason for the difference between that valuation and the sum paid by Clyde Gateway was not explored at the proof. Either the valuation was unduly low, or, for whatever reason, Clyde Gateway Development Limited, which is a publicly funded organisation involved in the regeneration of the east end of Glasgow in connection with the Commonwealth Games, paid well over the market price. The evidence indicated that the deal with Clyde Gateway was arranged by Mr Pelosi senior and that he was "delighted by it". The administrators gave evidence to the general effect that, when interviewed by them, Mr Pelosi senior said that he considered that he should retain the benefit of negotiating such a good deal with Clyde Gateway. There was no suggestion then of any loan agreement between Stonegale and Strathcroft. That only emerged in October 2012 after the present proceedings had begun.

[11] Notwithstanding the contract with Clyde Gateway, the bank was being told that 278 Glasgow Road was being sold for a sum in line with the valuation. The bank was never informed of the contemporaneous sale for the larger sum. Had the bank known of the almost £2.5m being paid for 278 Glasgow Road, it would not have discharged the securities of the other properties unless both the true purchase price of 278 Glasgow Road and the value of the other properties was paid to the bank. Mr Brown said:

"It was only by inserting Strathcroft as an intermediary that Mr Pelosi could attribute a nominal sale price of £762,000 to 278 Glasgow Road and use the funds received from Clyde Gateway in respect of the purchase of that single property to secure the release of the securities over all five properties and freely transfer these to his son and his son's company with no further funds being required."

[12] Mr Charles Jackson, a solicitor with MBJ, explained that for some time his firm had been instructed to undertake the conveyancing work in respect of property transactions undertaken by Mr Pelosi senior and his companies. There was a property business and a car hire business, with Mr Pelosi junior having taken over the latter some years previously. In addition to conveyancing services, the firm drafted and reviewed securities in respect of the properties. Mr Pelosi senior had come under pressure from the bank to reduce the lending. From about 2005/6 a colleague, Mr Frame, had taken over the day‑to‑day work for Mr Pelosi senior and his companies. Mr Jackson had met Mr John Anderson. He had the impression that he was an employee or business associate of Mr Pelosi senior. Mr Pelosi senior did deals all the time with different people. Mr Jackson was confident that MBJ did not draft the loan agreement involving Strathcroft and Stonegale. He commented that it seemed to be more of an IOU - than an agreement. He had never been involved with either Strathcroft or Stonegale. Mr Jackson confirmed that the firm's ledger shows that 278 Glasgow Road was sold for £2,400,000. After its receipt, that sum (less £50/60,000) was paid to McClure Naismith, acting on behalf of the bank, in order to repay outstanding indebtedness. Of the balance, MBJ took some fees, and the rest was paid to Mr Pelosi senior personally. That was the only money passing through MBJ. At the time Mr Jackson was only aware of the sale of 278 Glasgow Road.

"It is my understanding that it was a straightforward sale of 278 Glasgow Road to Clyde Gateway and the sale proceeds were used to settle outstanding indebtedness to Anglo Irish Bank...I thought it was only 278 Glasgow Road which was sold."

Mr Pelosi senior provided information to Mr Jackson "on a need to know basis". Mr Jackson simply did the conveyancing. He observed that Clyde Gateway "was paying millions in public money to acquire these industrial sites for regeneration", and that "the sale of 278 Glasgow Road came at the right time to help ease the pressure that Anglo Irish Bank was placing on Mr Pelosi due to his indebtedness".

[13] Mr Jackson's colleague, Mr Frame, gave evidence. He stated that Mr Pelosi senior

"is the type of guy who does not like to put things down in writing. He is the guy who does the deals himself through the agents. He does not delegate."

He only did the conveyancing for Mr Pelosi senior. Mr Pelosi would phone so often during the day that Mr Frame "could not even think about making file notes". Only he and Mr Jackson dealt with Mr Pelosi senior. Mr Frame also had contact with Mr Angelo Ianiello, who was Mr Pelosi senior's "right hand man", and who "would only ever do what (Mr Pelosi senior) told him". Mr Frame only took instructions from Mr Pelosi senior, though he had met John Anderson and David Simpson, who were business associates. He knew Mr Pelosi junior and occasionally took instructions from him, but only in relation to Mr Pelosi junior's personal purchases. Mr Pelosi junior did not give any instructions regarding the business transactions, which were for Mr Pelosi senior alone. Mr Pelosi senior would come to Mr Frame and say, "This is what I have agreed and you just have to do it". As to the property transactions with which this action is concerned, initially Mr Frame was told that it was only a security release. Then he was told about inter-company transfers. "He would just tell me where to transfer the properties and I would transfer them". Mr Frame knew that Strathcroft was one of Mr Pelosi senior's companies. Mr Pelosi senior provided all of the instructions, whether he was a director of the company concerned or not. "In Mr Pelosi's eyes, all the companies belonged to him and he could do as he wished with them all". Mandates signed by a director were always provided.

[14] Mr Frame acted for Oceancrown, Strathcroft and Stonegale, with instructions coming from Mr Pelosi senior in respect of all three companies. Mr Frame does not remember Mr Pelosi junior being the director of Stonegale. He received no instructions from him. The accountant, Mr Cahill, "knew the company structures and how everything fitted together". Regarding 278 Glasgow Road, Mr Frame acknowledged that on 10 November 2010 he witnessed both the Oceancrown disposition to Strathcroft and the Strathcroft disposition to Clyde Gateway. He could not remember why this happened before the other conveyances. He did not question the back‑to‑back sales, nor the differing purchase prices. "I assumed that the company books of each entity would account for this with the appropriate entries". He did not think that there would be a benefit to Mr Pelosi senior from structuring the transaction in this way. He received the funds from Clyde Gateway on behalf of Strathcroft. John Anderson then mandated him to send the funds to the bank in order to discharge the securities. "This payment was made on behalf of Oceancrown". Mr Frame did not know why Strathcroft would want to pay the debts of Oceancrown. He was simply instructed to send the money. He did not think that anything was strange. "In fact, it was normal". Mr Frame confirmed that the money delivered to the bank came from the Clyde Gateway funds.

[15] Mr Frame took instructions over the phone from Mr Pelosi senior as to how much value was to be attributed to each of the Glasgow Road properties. The other dispositions are dated 24 November, with a date of entry of 16 November. Mr Frame knew that no monies were paid for those transactions. "There was never any intention to pass money through MBJ" regarding those transactions. He expected this to be reflected in the companies' accounts. The only funds expected were those from Clyde Gateway. These were not "arm's length transactions". Mr Frame understood Stonegale to be another of Mr Pelosi senior's companies.

[16] Mr Frame acted for both parties in the Roslea Drive transaction. Again he expected no funds "because this was just another transfer, albeit it was to Mr Pelosi junior". It was "not an arm's length transaction". "I simply drafted the disposition as instructed by Mr Pelosi senior". Mr Frame confirmed that in respect of the transactions he acted for the various companies, Mr Pelosi junior, and Mr Lazari (being the subsequent purchaser of Roslea Drive and the partner of Mr Pelosi senior's daughter). Under reference to MBJ's ledgers, Mr Frame noted several occasions when large sums were paid to Mr Pelosi senior personally, and also certain payments to his daughter. Mr Frame would sanction this so long as there was a mandate from the company. "You have to remember that Mr Pelosi used all these companies as his own".

[17] The other joint administrator, Mr Graeme Bain, gave evidence. He elaborated upon the results of the investigations into the various companies, the background to the relevant transactions, and the reasons for raising the present proceedings. He dealt with the loan agreement and the reasons he considered it to be invalid - a subject to which I will return.

[18] Neither party led evidence from Mr Pelosi senior.

[19] Mr Pelosi senior's accountant, Mr John Cahill CA of Cahill Jack Associates, gave evidence. He took instructions as to his work for Stonegale from Mr Pelosi senior, Mr Pelosi junior and others. He submitted the application form for Stonegale to be struck off. The group consisted of some 40/50 companies, and he would almost certainly have submitted a number of such documents on the same day. Administratively it was difficult to keep track of the companies. He was not aware of Stonegale owning properties, otherwise he would not have submitted the form. His firm prepared the accounts for Stonegale, which show assets of £1. He had been told that the company had no bank account.

[20] Mr Pelosi junior provided a signed witness statement in which he confirmed that "everything in this statement is true to the best of my knowledge and belief". In it he confirmed that he is a director of and shareholder in Stonegale, and that he has many business interests. In early 2010 his father had many properties which were being marketed by Messrs King Sturge. When, after about nine months, they remained unsold, he agreed purchase prices with his father for 110, 210 and 260 Glasgow Road, Rutherglen. The witness statement continued by stating that he also agreed to purchase 64 Roslea Drive from Questway. He explained that his father had "always been very private with his business interests", and so he did not know much about the companies which owned the properties he was buying. The statement continued to the effect that he/Stonegale paid the market prices in respect of the Glasgow Road properties, that is £200,000 to Oceancrown regarding 110; £450,000 to Oceancrown in relation to 260; and £934,000 to Loanwell in respect of 210 Glasgow Road. The market valuations had been prepared by the sellers. He could not recall whether he had seen them, but he was happy to pay what he considered to be reasonable prices for the subjects. Mr Pelosi junior noted that he had been shown valuations of the properties. "After the purchase price had been agreed between my company and the sellers...the transactions were taken forward via our solicitors. He instructed Charles Jackson to act on behalf of Stonegale. He was guided by his solicitors in respect of the transactions. He did not consider Stonegale to be a company which was connected to Oceancrown and Loanwell.

[21] The statement explained that, in order that Stonegale could purchase the properties at Glasgow Road, Strathcroft loaned Stonegale £1.584 million. The funds were paid direct to the company's solicitors and he instructed them to remit them to the sellers. He does not know what happened to the funds thereafter. It was a 28 year loan based on 300 monthly repayments of £7,511.48, and an initial three year deferred payment period. When presented with this loan, he agreed to purchase the properties. The loan agreement was arranged by his father as owner of Strathcroft and agreed by him on behalf of Stonegale. He thought the agreement would have been prepared by his father and his father's solicitor. He does not know much about Strathcroft, other than that it is a non‑trading company, with the debt of Stonegale being its main asset.

[22] In his witness statement Mr Pelosi junior commented that 64 Roslea Drive is "a bit of a messy affair". He obtained the purchase price of £68,000 from John Anderson, who owed him money. He had previously owned the property, having bought it in the early 1990s. He intended to add it to his rental property portfolio. In the result he refurbished it, and sold it about a year later to Mr Lazari for £125,000.

[23] As to 278 Glasgow Road, Mr Pelosi junior said that he knew little, other than that it was part of his father's portfolio, and was on the market at around the same time as the other Glasgow Road subjects. Mr Pelosi junior was not told about his father's business interests. At the time Mr Pelosi junior had no interest in purchasing 278 Glasgow Road. He was not surprised that his father could obtain funds to allow Strathcroft to lend to him to finance the purchases. "I just know that my father told me he could get the funds...I would never ask questions". Mr Pelosi junior is surprised that the purchases are now being challenged, given that the bank had agreed to sell the properties at the stated prices to anyone responding to their lengthy marketing.

[24] Key passages in Mr Pelosi junior's witness statement bear little relation to the rest of the evidence in the case, not least in respect of the Glasgow Road transactions. Mr Fairley called him to give oral evidence. Contrary to the usual practice, Mr Fairley did not ask him to accept and adopt his witness statement. During his evidence Mr Pelosi junior said that he considered that the three Glasgow Road properties would suit his property portfolio. They were commercial properties in need of renovation. His father raised the finance through one of his companies, namely Strathcroft. (He knows that now, but probably did not know it then.) When asked if the monies passed through Stonegale's bank account, he replied - not to my knowledge. He knew that the bank's securities needed to be discharged. He was referred to the loan agreement. He stated that on 16 November 2010 he signed it "as an IOU" for the borrowings on the three Glasgow Road properties. He signed it as a director of Stonegale, "which he controls in its entirety". He confirmed that he had read his witness statement before he signed it. Mr Pelosi junior was asked whether, when he signed it, he was trying to tell the truth - to which the reply was yes. However he had been "mistaken" in some of what he said. His father had told him that one of his father's companies could supply funding and he would need to give an IOU for that. His father produced the document and he signed it. Stonegale would repay the monies by improving the properties and renting or reselling them.

[25] On being told that Strathcroft had been struck off the register in May 2013, Mr Pelosi junior indicated that he had nothing to do with that. When asked about the moves to strike off Stonegale, Mr Pelosi junior said that there was little he could add to his father's accountant's evidence. It may have been a misunderstanding. He did not recall signing anything in that regard. Mr Pelosi junior does not read all the documents which Mr Cahill gives him for signature. He would not tell Mr Cahill that Stonegale was non‑trading. Mr Pelosi junior stated that he had no intention that Stonegale should be removed from the Register of Companies.

[26] As to 64 Roslea Drive, Mr Pelosi junior had previously owned those subjects, but he had gifted the property to his father. He had been "trying to tell the truth" in his witness statement regarding the purchase of 64 Roslea Drive, but on the evidence now, clearly that was not how it had been financed. In cross‑examination, Ms Ower asked Mr Pelosi junior if he was prepared to adopt his witness statement into his evidence, to which he replied in the affirmative. He said that he understood what it meant "to adopt" the document into his evidence.

[27] At the close of the evidence, a joint minute was tendered stating that parties were agreed that in November 2010 the open market values of the following properties was as per the DM Hall reports, 7/9 and 7/12 of process, namely:

·      110 Glasgow Road - £150,000

·      210 Glasgow Road - £860,000

·      260 Glasgow Road - £450,000

·      64 Roslea Drive - £65,000

The defenders' submissions on the Glasgow Road and Roslea Drive transactions

[28] Mr Fairley submitted that the issue for the court is whether the alienations of 110, 210 and 260 Glasgow Road, Rutherglen and 64 Roslea Drive, Glasgow were made "for adequate consideration" in terms of section 242 of the Act. The burden of proof rests on the defenders. Oceancrown, Loanwell and Questway each received "consideration" which was paid to their secured lender, and the bank in turn reduced their outstanding indebtedness. The bank discharged the securities, allowing the properties to be disponed. The fact that the monies were paid directly to the lender is of no relevance. Nor does it matter that the monies were paid by someone other than the ultimate disponees. The discharge of a debt owed to a third party is sufficient for present purposes. Reference was made to Phillips v Brewin Dolphin Bell Lawrie Limited [2011] 1 WLR 143. The bank received the market valuation of the Glasgow Road properties. The alienating company received a value for that disposal - here in the form of the commensurate reduction in their indebtedness to the bank. There was no detriment to the general body of their creditors.

[29] Mr Fairley noted that between 11 and 16 November 2010, £2.414 million was remitted to the bank's solicitors by MBJ for the purpose of securing the discharge of the securities over the said four properties plus 278 Glasgow Road. The bank agreed to grant the discharges in return for that sum, which was made up as explained in the relative correspondence. The securities were discharged and the indebtedness to the bank reduced pro rata by the value attributed to each of the properties. By way of the joint minute, it was agreed that the sums attributed to 110, 210 and 260 Glasgow Road and 64 Roslea Drive exceeded their market value as at November 2010, thus full consideration was given.

[30] Mr Fairley accepted that the evidence shows that the sale by Strathcroft to Clyde Gateway provided the funds for the later discharge of the securities over the other properties. However, even if it were accepted that the sale of 278 to Strathcroft was at an undervalue, that has no impact on the value given for the other properties. The transactions were separate. There were five transactions, five separate discharges, and five dispositions. Different parties were involved. Contrary to the agreed basis in November 2010, the pursuers now seek to allocate all of the monies to 278 Glasgow Road. This bears no relation to what happened. There was no alienation of 278 to either Stonegale or Mr Pelosi junior. Even if there were no loan agreement concerning Strathcroft and Stonegale, adequate consideration would still have been given for the property transactions under attack. Mr Fairley submitted that the validity or otherwise of the loan agreement is, in effect, academic.

[31] When asked whether the consideration given for 278 could also be consideration for the other properties, Mr Fairley replied that the source of the funds is irrelevant. The extent of the consideration should be measured by the reduction in the indebtedness to the bank. The bank accepted the £2.414 million on the basis of the values given in the correspondence - not as the consideration for 278. It is the pursuers who are now seeking to allocate all of it to 278. According to Mr Fairley, in truth this is a misrepresentation case. The bank decided to discharge the security over 278 on the basis of the valuation obtained from Messrs Richard Ellis, which allowed it to proceed as per the tables in the letters passing between solicitors. These were not notional sums. Unfortunately for the administrators, they do not challenge the alienation of 278 Glasgow Road. In reality the bank made a bad bargain. Section 242 does not prescribe the source of the consideration. Reference was made to the speech of Lord Scott of Foscote in Phillips at paragraph 20.

[32] While Stonegale did not pay £200,000 for number 110, the selling company did have its indebtedness reduced by that amount, and the security was discharged, thereby allowing the subjects to be disponed to Stonegale. Reference was made to the judgment of Millet J in Re M C Bacon [1990] BCLC 324 at 340 G-H. While £200,000 went out - £200,000 came in. One must look at it from the point of view of Oceancrown, not Stonegale. The court might infer that Clyde Gateway paid far too much for 278, but that is not the issue in these proceedings. The bank made a bad deal regarding 278, but it does not follow that it made bad deals in relation to 110 and the other properties.

[33] As to the loan agreement, Mr Fairley submitted that, on a fair reading, it should be regarded as an IOU. However, if he is well founded in respect of the earlier submissions, nothing turns on the terms or the validity of that document. Indeed, if he is wrong on the first issue, even if the loan agreement is valid, this does not save the defenders' position. As I understood it, Mr Fairley was indicating that either Strathcroft did or did not provide the consideration for the four properties. If they did, it does not matter if the loan agreement is a sham. If they did not, a genuine agreement between Strathcroft and Stonegale makes no difference.

[34] The result is that the question as to the validity of the loan agreement is academic. In case that is wrong, Mr Fairley observed that the burden of demonstrating that the document is a sham rests upon the pursuers. Reference was made to Slocum Trading Limited and others v Tatik Inc and others [2012] EWHC 3464 (Ch) paragraphs 245/50, and National Westminster Bank plc v Jones and others [2001] BCLC 98 at paragraphs 36/40, 59, and 61/8. Mr Frame had said that Strathcroft paid the money to the bank and the dispositions went to Stonegale - so the loan agreement does make commercial sense. Counsel submitted that there is a strong presumption against a sham transaction. However he emphasised that the key question is - was consideration paid? It is not relevant to inquire as to who paid it, nor as to the source of the money. Consideration was provided to Oceancrown by paying off its indebtedness to the bank (and similarly to Loanwell and Questway as cross-guarantors).

Submissions for the pursuers

[35] Ms Ower pointed out that the line of defence elaborated upon by Mr Fairley was not foreshadowed in the written pleadings, which mirror the version of events presented in Mr Pelosi junior's written statement, namely that monies lent to Stonegale by Strathcroft were used to purchase the Glasgow Road properties. The admitted position now is that no funds changed hands between the two companies, and the former paid nothing for the properties. The first expression of a defence in relation to Roslea Drive was articulated in Mr Pelosi junior's witness statement, namely that the price was paid using funds provided by Mr Anderson to repay a debt owed by him to Mr Pelosi junior - but again this explanation has been jettisoned.

[36] In all the circumstances it is understandable that Ms Ower cries foul. However I consider that Mr Fairley is entitled to argue that, even on the facts as presented by the pursuers, they are not entitled to the remedies sought.

[37] Ms Ower stressed that there was only one pot of money - namely the purchase price of 278 Glasgow Road, and that nothing was paid in return for the dispositions under challenge. The monies paid to the bank were not consideration for those properties. Phillips was a very different case on its facts and context. The evidence plainly points to the loan agreement being a sham. Mr Pelosi junior and Mr Cahill were neither credible nor reliable witnesses. The evidence of the other witnesses on the key issues should be accepted as truthful and reliable. Adequate consideration for all of the properties, including 278, would have been in excess of £4 million. The bank was told that the sale price of 278 was £762,000. The bank proceeded upon that basis. Mr Pelosi senior was the controlling mind of all of the companies, including Stonegale. The key facts were concealed from the bank. All of the debts were cross guaranteed by the various companies, so it may be correct to say that Loanwell and Questway received a reduction in their indebtedness to the bank, however Stonegale did not pay the £2.4 million.

Discussion

[38] The issue turns on whether the challenged alienations were "made for adequate consideration" in terms of section 242(4)(b) of the Act. If the defenders fail to prove this, the pursuers' claims succeed. This is a question of fact - see Phillips. "Consideration" is "something which is given, or surrendered, in return for something else" - MacFadyen's Trustee v MacFadyen 1994 SC 416 at 421 (Extra Division). The question can be asked - did Oceancrown dispone 110 and 260 Glasgow Road to Stonegale in return for something? Mr Fairley contends that the answer is yes - namely, in return for the reduction in the company's indebtedness to the bank resulting from the earlier payment by Strathcroft through MBJ to the bank.

[39] The correspondence at the time demonstrates that the monies were paid to the bank in order to obtain discharges of the bank's securities over all the properties. This allowed not only the sale of 278, but also the subsequent dispositions to Stonegale and to Mr Pelosi junior. Despite the terms of those dispositions, no monies changed hands, hence Mr Fairley relies on the earlier events and their consequences. The payment to the bank had the effect of reducing Oceancrown's indebtedness to the bank, and provided benefit to those companies subject to cross guarantees. However it is also true that the bank was misled in relation to the funds it received. They were presented as the sale price of the four Glasgow Road properties - see MBJ's letter of 19 August 2010, and they were so understood - see McClure Naismith's letter of 11 November 2010 to the bank. Everyone, apart from the bank and the bank's solicitor, knew that the funds were the sale price of only 278 Glasgow Road. Mr Fairley does not, in terms, say that the consideration for the transfers under challenge was the payment of the 278 funds to the bank - he says it was the consequential reduction in the group's indebtedness to the bank, which was in line with valuations of the properties previously obtained. The present issue arises from the large difference between the valuation of 278 and its actual sale price, and from the misleading correspondence between MBJ and McClure Naismith.

[40] Albeit at the eleventh hour, Mr Fairley has constructed an argument in favour of the defenders which is consistent with the facts of the case. However, in my opinion, it is wrong. No one paid anything for 110, 210, 260 Glasgow Road and 64 Roslea Drive. The sellers, namely Oceancrown, Loanwell and Questway, did not receive anything in return for the dispositions under challenge. They gifted the properties to the disponees. The fact that the bank was misled into using part of the sale price of 278 Glasgow Road to discharge all the standard securities does not supply the missing consideration. Had the bank known the true facts, namely that 278 was sold for almost £2.5 million, the same overall reduction in bank indebtedness would have occurred, but only the standard security over 278 would have been discharged.

[41] The £2.4 million given to the bank was the consideration for 278. The surrounding circumstances, including the valuations and the correspondence between MBJ and the bank's solicitors, allowed the sale price for 278 to be used to gain the discharge of the securities over the other properties; but none of that, nor any part of the overall reduction in the companies' indebtedness to the bank, can properly be categorised as consideration for the dispositions to Stonegale. The bank, acting on the information from MBJ, treated the funds as the sale price of all the subjects, but that was not an accurate understanding.

[42] Everything depended upon the bank and the bank's solicitor being unaware of the truth. No doubt they assumed that they could trust the information provided by MBJ. That the bank was prepared to discharge the standard securities over all five properties in return for the monies forwarded to it does not create a consideration given in return for the subsequent dispositions to Stonegale. No party gave the sellers anything in return for the conveyances under challenge. Any value received was the value paid in respect of number 278. That is what was transferred to McClure Naismith. In my view nothing else alters that basic fact. All that happened was that Strathcroft, on the direction of Mr Pelosi senior, paid the bank monies which were designed to, and did persuade the bank to discharge the standard securities over the five properties, all in order to facilitate the subsequent gratuitous sales. Neither that payment, nor any consequential reduction in indebtedness, was in consideration for the subsequent transactions. It was a mechanism for allowing the inter-company transfers which it was hoped would achieve the retention of the "profit" on 278 within the group (and regarding Roslea Drive, Mr Pelosi junior) - and free of the bank's securities.

[43] Had the funds been the true sale price of the disponed properties, then all would be well - but they were the sale price of only one of them. The dispositions under challenge were gratuitous alienations. Were it otherwise the bank would have received in excess of £4 million, and the overall indebtedness would have been reduced by that amount. The price obtained for 278 was used to allow the other Glasgow Road properties to be transferred without consideration to another company which, nominally at least, was owned and controlled by Mr Pelosi junior, and, in the case of 64 Roslea Drive, to him personally. If it be the case that Mr Pelosi senior arranged the sale of 278 to Clyde Gateway for a sum well above its true value, one can understand a desire that the bank should not receive the benefit - but in my view, any such expectation falls to be disappointed.

[44] Much of the proof was devoted to the issue of whether the loan agreement is a genuine and valid document. I agree with Mr Fairley's submission that this is a side issue. However, in case that is wrong, I will express a view on the matter. It is a sham. In the whole circumstances, it would strain credulity beyond breaking point to see this document as anything other than another part of the machinations designed to protect the "profit" on the sale of number 278. If it had been signed in November 2010, it would have been produced and referred to long before it made an appearance during the course of these proceedings. The companies' lawyers knew nothing about it, and there is no supporting documentation. Only Mr Pelosi junior spoke to it. His reliability is nil, given his willingness to sign a witness statement and then casually dismiss much of it as "mistaken" when giving oral evidence. His evidence was littered with admissions that his earlier statements were wrong and that his evidence could not be squared with the facts.

[45] Had there been a genuine view that Strathcroft was owed this money, it would not have been struck off the Register of Companies. The efforts by Mr Cahill and Mr Pelosi to explain away the attempt to remove Stonegale from the Register were wholly unconvincing. The loan agreement itself has a half-baked, back of an envelope appearance, which is extraordinary for a purported commercial deed concerning such a large sum.

[46] Had Strathcroft remained extant, it is very hard to imagine any attempt by it to rely upon the loan agreement. Both companies were, in effect, controlled by Mr Pelosi senior. It is clear that Mr Pelosi junior would do as his father wished. There is a high degree of artificiality about the issue of whether Strathcroft could ever enforce payment from Stonegale. That said, I am wholly persuaded that the document was concocted purely for the purpose of the defence of these proceedings, rather than to reflect any genuine arrangement between the two companies. There was no mention of it until October 2012. The timing of its appearance explains the fact that the sum involved does not cover the "purchase price" of 64 Roslea Drive - that property figuring in proceedings raised after the first reference to the loan agreement.

[47] The reality is that Strathcroft was involved in the whole matter only in order to provide a short-lived intermediary between Oceancrown and Clyde Gateway in respect of the sale of 278 Glasgow Road. It was a cog in Mr Pelosi senior's machine - and the purported loan agreement is in no different category. The money was paid to MBJ then to the bank on the instructions of Mr Pelosi senior. Strathcroft had no real involvement in that - and had no real intention to become involved in any legal relationship with Stonegale. It is fanciful to think that Strathcroft lent money to Stonegale, or that Stonegale intended to bind itself to pay £1.5 million to Strathcroft. Had it been necessary to do so, I would have upheld Ms Ower's submissions on this issue.

Decision

[48] The overall result is that I shall reduce the dispositions of 110 and 260 Glasgow Road, Rutherglen, and order the defenders to execute dispositions of the subjects to the pursuers within 21 days, failing which, warrant is granted to the Deputy Principal Clerk of Session to execute and deliver dispositions in appropriate terms. A similar order will be made in the proceedings concerning the disposition of 210 Glasgow Road granted by Loanwell. With regard to the action concerning the sale of 64 Roslea Drive to Mr Pelosi junior, he will be ordered to repay the £125,000 paid to him by Mr Lazari for the purchase of that property. Given that there are a number of related proceedings, some of them overlapping, before granting decree I shall have all the proceedings put out by order for appropriate disposal.