Trinity
Term
[2016] UKSC 30
On appeal from: [2015]
CSIH 12
JUDGMENT
Brown and another, the Joint Administrators of
Loanwell Limited (Respondents) v Stonegale Limited (Appellant)
(Scotland)
Brown and another, the Joint Administrators of
Oceancrown Limited (Respondents) v Stonegale Limited (Appellant)
(Scotland)
Brown and another, the Joint Administrators of
Questway Limited (Respondents) v Pelosi (Appellant) (Scotland)
before
Lord Neuberger, President
Lord Sumption
Lord Reed
Lord Carnwath
Lord Hodge
JUDGMENT GIVEN ON
22 June 2016
Heard on 15 February 2016
|
Appellant
Alan Summers QC
David Massaro
(Instructed by
Halliday Campbell WS)
|
|
Respondents
Kenneth McBrearty
QC
Susan Ower
(Instructed by
Pinsent Masons LLP)
|
LORD REED: (with whom Lord
Neuberger, Lord Sumption, Lord Carnwath and Lord Hodge agree)
1.
These three conjoined appeals concern section 242 of the Insolvency Act
1986, as amended. Where section 242(1) applies, and a company enters
administration, an alienation by the company is challengeable by the
administrator. In terms of section 242(2), section 242(1) applies where by the
alienation, any part of the company’s property is transferred or any claim or
right of the company is discharged or renounced, and the alienation takes place
on a relevant day as defined by section 242(3) (that is to say, within a
specified time before the date when the company enters into administration). In
terms of section 242(4), on a challenge being brought under subsection (1), the
court shall grant decree of reduction or for such restoration of property to
the company’s assets or other redress as may be appropriate, but the court
shall not grant such a decree if the person seeking to uphold the alienation
establishes that it was made for adequate consideration.
2.
These proceedings were brought under section 242(1) by the joint
administrators of Oceancrown Ltd, Loanwell Ltd and Questway Ltd, in respect of
alienations made by each of those companies of four properties in Glasgow
during November 2010, nine months before the companies went into
administration. The alienations took place on relevant days as defined. The
administrators are the respondents to the present appeals.
The facts
3.
The facts, as found by the Lord Ordinary, are as follows. Oceancrown and
the other companies in administration were part of a group of companies
controlled by Ralph Norman Pelosi (“Mr Pelosi senior”). He was the beneficial
owner of their shares, the sole director of Oceancrown and Loanwell, and a
shadow director of Questway. He was also the 99% owner (subsequently 100%) of
another company, Strathcroft Ltd. The nominal director of that company was John
Anderson. Norman Ralph Pelosi (“Mr Pelosi junior”) was the sole shareholder and
director of a further company, Stonegale Ltd. He is the appellant in one of the
appeals, and Stonegale is the appellant in the others.
4.
A secured facility in the region of £17.3m had been made available to
Oceancrown by Anglo-Irish Bank. The other companies in the group had
cross-guaranteed the debt. Oceancrown owned a commercial property at 278
Glasgow Road, Rutherglen. It also owned properties at 110 and 260 Glasgow Road.
Loanwell owned a property at 210 Glasgow Road. Questway owned a property at 64
Roslea Drive, Glasgow. The bank held standard securities over each of these
five properties.
5.
Mr Pelosi senior had concluded an agreement with Clyde Gateway
Development Ltd for the sale of 278 Glasgow Road for £2,467,500 inclusive of
VAT: a sum far in excess of an earlier valuation of the property at the sum of
£762,000. Subsequent events were, in the Lord Ordinary’s words, “machinations
designed to protect the ‘profit’ on the sale of number 278” (para 44), by
keeping it out of the hands of the bank.
6.
On 19 August 2010 Robert Frame, a solicitor of Miller Becket and Jackson
(“MBJ”), a Glasgow firm of solicitors, wrote to the bank’s solicitor, Mr
Gillespie of McClure Naismith, in relation to the release of the properties
from the bank’s securities, giving “details of the properties and the relevant
sale price”. According to the details stated, the sale price of 278 Glasgow
Road was £762,000; the sale price of 110 Glasgow Road was £200,000; the sale
price of 210 Glasgow Road was £934,000; and the sale price of 260 Glasgow Road
was £450,000. Mr Gillespie was subsequently informed that 64 Roslea Drive was
also to be sold, at a price of £68,000. The total sale price of the five
properties, as stated, was £2,414,000. Mr Gillespie passed this information on
to the bank, and prepared discharges of the standard securities. These were
duly executed by the bank, and Mr Gillespie was authorised to deliver them to
MBJ in exchange for the free proceeds of sale. In reality, as explained
earlier, the actual sale price of 278 Glasgow Road was £2,467,500, and no sales
had been agreed in respect of the other properties.
7.
On 10 November 2010 Oceancrown disponed 278 Glasgow Road to Strathcroft.
The consideration was recorded in the deed as being £762,000. On the same day,
Strathcroft disponed the same property to Clyde Gateway for £2,467,500. Mr
Frame witnessed the execution of both dispositions. The Lord Ordinary found
that “Strathcroft was involved in the whole matter only in order to provide a
short-lived intermediary between Oceancrown and Clyde Gateway. … It was a cog
in Mr Pelosi’s machine” (para 47).
8.
On 16 November 2010 Mr Frame received a letter signed by Mr Anderson on
behalf of Strathcroft, authorising MBJ to send the bank the sum of £2,414,000
“in respect of purchases of [the five properties]”. Mr Frame transmitted the
money as instructed. Once the bank received the funds, the executed discharges
were delivered. The Lord Ordinary found that “the money was paid to MBJ then to
the bank on the instructions of Mr Pelosi senior. Strathcroft had no real
involvement in that” (para 47). He also found that “the bank was misled in
relation to the funds it received” (para 39). “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” (para 41). “Everyone, apart from
the bank and the bank’s solicitor, knew that the funds were the sale price of
only 278 Glasgow Road. ... Had the bank known the true facts, namely that 278
was sold for almost £2.5m, the same overall reduction in bank indebtedness
would have occurred, but only the standard security over 278 would have been
discharged” (paras 39-40). “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” (para 42).
9.
As a consequence of the fact that “the
bank was misled into using part of the sale price of 278 Glasgow Road to
discharge all the standard securities” (para 40), the four remaining
properties, with an agreed value of £1.525m, were now free of the bank’s
standard securities. It only remained to place them entirely beyond the bank’s
reach.
10.
On 24 November 2010, 110, 210 and 260 Glasgow Road were disponed to
Stonegale, and 64 Roslea Drive was disponed to Mr Pelosi junior. It is those
dispositions which are challenged in the present proceedings. The dispositions,
witnessed by Mr Frame, contained a date of entry of 16 November 2010, and
recorded the consideration given as being in accordance with the figures given
to Mr Gillespie. In reality, nothing was paid. The following year, Mr Pelosi
junior disponed 64 Roslea Drive to a third party for £125,000.
11.
In the proceedings before the Lord Ordinary, a document was produced
which purported to be a loan agreement in the sum of £1,584,000, signed by Mr
Pelosi junior and dated 16 November 2010. It narrated that it had been entered
into between Strathcroft and Stonegale to enable the latter to finance the
purchase of the properties at 110, 210 and 260 Glasgow Road. In evidence, Mr
Pelosi junior confirmed that he had signed the loan agreement on 16 November
2010. The Lord Ordinary found that the document was a sham (para 44),
“concocted purely for the purpose of the defence of these proceedings” (para
46).
The proceedings below
12.
Before the Lord Ordinary, it was argued that the four
dispositions under challenge were made by the companies for adequate
consideration, namely the reduction in their contingent liabilities (under
their cross-guarantees of Oceancrown’s obligations) which resulted from the
payment made by Strathcroft to the bank. That reduction in indebtedness, of £2,414,000, was in excess of the
open market values of all five properties, and therefore constituted adequate
consideration. That argument assumes that the open market value of 278 Glasgow
Road was the £762,000 at which it had been valued by a surveyor: an assumption
which is contradicted by the fact that Clyde Gateway paid almost £2.5m for it
in an arm’s length transaction whose bona fides is not disputed. More
fundamentally, the argument disregards the fact that the four other properties
were all disponed gratuitously in subsequent transactions.
13.
In rejecting the argument, the Lord Ordinary focused on the latter
point:
“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 dispones. ... 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.” (paras 40 and 42)
The Lord Ordinary added:
“The dispositions under challenge
were gratuitous alienations. Were it otherwise the bank would have received in
excess of £4m, 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.” (para 43)
14. Accordingly, the Lord Ordinary decided that he
should reduce (ie set aside) the three dispositions to Stonegale, order the
defenders to execute dispositions of those subjects to the administrators, and
order Mr Pelosi junior to repay the £125,000 which he had received for the sale
of the fourth property. Before granting decree, he decided to have the
proceedings put out By Order for appropriate disposal.
15. That decision was upheld by an Extra Division of
the Inner House (Lord Menzies, Lord Brodie and Lord McGhie). No issue was taken
with the facts found by the Lord Ordinary. The same argument was repeated, and
again rejected, for the same reasons.
The present appeal
16. In the absence, at the relevant time, of any
requirement to obtain permission to appeal to this court, the appellants took
the opportunity to challenge the approach adopted by the courts below. They
submitted that the administrators could have pursued a number of alternative
remedies. They could have challenged the alienation of 278 Glasgow Road by
Oceancrown to Strathcroft. They could have proceeded against Mr Pelosi senior
as director of Oceancrown for breach of his fiduciary duty, and recovered the
proceeds of his breach from the ultimate beneficiaries. If the bank was the
victim of a fraudulent misrepresentation, it could have recovered damages in
respect of its loss. The wrong remedy, it was argued, had been selected. The
failure to challenge the transfer by Oceancrown to Strathcroft meant that the
transfer by Strathcroft to Clyde Gateway could not be impeached. In any event,
the £762,000 paid by Strathcroft reflected a professional valuation of the
property, and therefore constituted the property’s market value.
17. There are no doubt a variety of remedies which
the administrators might have pursued, but the issue for this court is whether
they are entitled to the remedy which they have sought. That remedy does not
involve a challenge to the disposal of 278 Glasgow Road (or depend on whether
the disposal of that property by Oceancrown was at an undervalue, although it
plainly was), but a challenge to the other four dispositions as gratuitous
alienations. The gratuitous nature of the alienations was clearly explained by
the Lord Ordinary in the passages cited at para 13 above. Before the various
conveyances, the companies owned five properties. A bargain was in place for
the sale of one of those properties, 278 Glasgow Road, for the sum of £2.4m.
After the sale was completed, £2.4m was transferred to the bank in reduction of
borrowings, and the companies retained the other four properties, valued at
£1.525m. Those properties were then conveyed to the appellants. The companies
received nothing whatsoever in return. There was no reciprocity between those
disposals and the earlier payment made to the bank. The purpose and effect of
those transactions was to divert assets away from the companies’ creditors:
exactly what section 242 is intended to prevent. That they were gratuitous
alienations is plain and obvious.
18. The appeal is therefore dismissed.
