The Supreme Court dismissed an appeal concerning four Glasgow properties transferred by companies which later entered administration. Stonegale Ltd and Norman Ralph Pelosi received the properties but paid nothing. A sum paid to the bank was the price of a different property, used to obtain the release of securities, and was not consideration for these transfers. They were therefore gratuitous alienations under section 242 of the Insolvency Act 1986.
The transfers the administrators challenged
Under section 242 of the Insolvency Act 1986 an administrator can challenge certain transfers as gratuitous alienations. The critical question here was what the companies had received in exchange.
The joint administrators of Oceancrown Ltd, Loanwell Ltd and Questway Ltd challenged transfers made in November 2010, nine months before all three companies entered administration. The appeals were heard together. Stonegale Ltd and Norman Ralph Pelosi, referred to as Mr Pelosi junior, were the appellants. The administrators were the respondents.
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The properties and the misleading prices
The Lord Ordinary found that the companies formed part of a group controlled by Ralph Norman Pelosi, Mr Pelosi senior. He beneficially owned their shares, was sole director of Oceancrown and Loanwell, and was a shadow director of Questway. He also owned Strathcroft Ltd, whose named director was John Anderson. Mr Pelosi junior owned and directed Stonegale.
Anglo-Irish Bank had provided Oceancrown with a secured facility of about £17.3 million. The other companies had cross-guaranteed the debt. The bank held standard securities over five properties: 278, 110 and 260 Glasgow Road, owned by Oceancrown; 210 Glasgow Road, owned by Loanwell; and 64 Roslea Drive, owned by Questway.
Mr Pelosi senior had agreed to sell 278 Glasgow Road to Clyde Gateway Development Ltd for £2,467,500 including VAT, far more than an earlier valuation of £762,000. The Lord Ordinary described the subsequent events as machinations designed to keep the profit on that sale out of the bank’s hands.
On 19 August 2010, solicitor Robert Frame told the bank’s solicitor that the properties were being sold for £762,000, £200,000, £934,000 and £450,000 respectively. He was later told that 64 Roslea Drive would be sold for £68,000. The stated total was £2,414,000. The bank executed discharges of its securities, to be released in exchange for the sale proceeds. In reality, no sales of the other four properties had been agreed, and 278 Glasgow Road was being sold for £2,467,500.
On 10 November 2010 Oceancrown transferred 278 Glasgow Road to Strathcroft for a recorded price of £762,000. The same day, Strathcroft transferred it to Clyde Gateway for £2,467,500. The Lord Ordinary found that Strathcroft was only a short-lived intermediary. On 16 November, £2,414,000 was sent to the bank on Mr Pelosi senior’s instructions, described as relating to purchases of all five properties. The bank released every security. The Lord Ordinary found that it had been misled: apart from the bank and its solicitor, everyone knew that the money was the price of 278 Glasgow Road alone. Had the truth been known, the debt would still have fallen by that amount, but only the security over number 278 would have been discharged.
Nothing was given for the four later transfers
The four properties, with an agreed value of £1.525 million, were now free of the securities. On 24 November 2010, 110, 210 and 260 Glasgow Road were transferred to Stonegale, and 64 Roslea Drive to Mr Pelosi junior. These were the challenged transfers. Their deeds recorded the prices previously notified to the bank and a date of entry of 16 November, but nothing was paid. Mr Pelosi junior later sold 64 Roslea Drive for £125,000.
The judge rejected a document said to evidence a loan. Independently of that finding, the four transfers had brought nothing into the companies.
Why the reduction in bank debt was not consideration
The appellants argued that the transfers were made for adequate consideration because Strathcroft’s payment reduced the companies’ contingent liabilities under the cross-guarantees by £2,414,000, more than the asserted market value of all five properties. Lord Reed identified two flaws. The argument treated £762,000 as the market value of 278 Glasgow Road, although Clyde Gateway had paid almost £2.5 million in an arm’s length transaction whose bona fides was not disputed. More fundamentally, it ignored the later gratuitous transfers of the other four properties.
The Lord Ordinary held that the sellers received nothing for the challenged dispositions. The bank’s discharge of all five securities did not supply consideration for transfers made afterwards. The payment and any resulting reduction in indebtedness were a mechanism for freeing the properties and moving them, not the price of those later transactions. He said that, had the transfers not been gratuitous, the bank would have received more than £4 million. An Extra Division of the Inner House, consisting of Lord Menzies, Lord Brodie and Lord McGhie, accepted the facts and rejected the same argument for the same reasons.
The Supreme Court’s decision
The appellants said that other remedies might have been available, including a challenge to the transfer of 278 Glasgow Road, a claim against Mr Pelosi senior for breach of fiduciary duty, or a damages claim by the bank. They also said that £762,000 represented market value because it came from a professional valuation.
Lord Reed, with whom Lord Neuberger, Lord Sumption, Lord Carnwath and Lord Hodge agreed, accepted that various remedies might have been pursued. The issue was whether the administrators were entitled to the remedy they had chosen. That remedy challenged the four later dispositions, not the disposal of 278 Glasgow Road. It did not depend on that disposal being at an undervalue, although Lord Reed said that it plainly was.
Before these conveyances, the companies owned five properties and had a bargain to sell one for £2.4 million. After £2.4 million had been paid to the bank, they still held four properties worth £1.525 million. Those properties were then conveyed to the appellants and the companies received nothing. There was no reciprocity between that payment and the later disposals. Their purpose and effect was to divert assets from the companies’ creditors, which is what section 242 is intended to prevent. Lord Reed held that the gratuitous nature of the alienations was plain and obvious.
Verdict: The Court unanimously dismissed Stonegale’s and Mr Pelosi junior’s appeal. The administrators were entitled to challenge all four dispositions as gratuitous alienations. The earlier payment to the bank was not consideration for them.
Source: Brown and another, the Joint Administrators of Loanwell Limited v Stonegale Limited [2016] UKSC 30
