The Supreme Court held that Grampian’s off-market sale of its principal property to Carnbroe for £550,000 was not made for adequate consideration under section 242 of the Insolvency Act 1986. The sale formed part of an informal winding-up, and Carnbroe had not shown that a sale by the security holder or a liquidator would have produced a comparable net return. The Court remitted the case so that the remedy could be reconsidered in light of the court’s power to take account of consideration paid by a purchaser acting in good faith.
Grampian MacLennan’s Distribution Services Ltd carried on business from a warehouse, workshop and yard at East Kilbride, bought in 2005 for £630,000. By 2014 the company was in serious financial difficulty. Its liabilities exceeded £1 million, principally to HM Revenue and Customs and to NatWest, which held a standard security and a bond and floating charge. After its invoice-factoring facility was withdrawn, cash flow collapsed. Mr Quinn, who had recently become sole shareholder and director, sold the company’s vehicles and then agreed an off-market sale of the property to Carnbroe Estates Ltd.
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The disposition of 24 July 2014 stated a price of £550,000. Carnbroe paid NatWest the £473,604.68 then due under the secured loan and obtained a discharge; it paid the balance to Grampian only in June 2016, after the proof. Expert evidence put the open-market value at the date of sale at £740,000 or £820,000, assuming a willing seller, a willing buyer and a marketing period of 12 to 24 months. Both experts accepted that a restricted six-month marketing period would justify a discount of 25 to 30 per cent, and that £550,000 would not be inappropriate for an immediate off-market sale by a financially distressed vendor. No evidence was led of the net price likely to be obtained by NatWest on enforcement or by a liquidator.
HMRC presented a winding-up petition. Joint liquidators were appointed and challenged the sale as a gratuitous alienation under section 242 of the Insolvency Act 1986. The Lord Ordinary held that Carnbroe had established adequate consideration: Grampian’s position was perilous, NatWest was threatening enforcement, and a lengthy open-market exercise was not realistically available. The First Division reversed that conclusion, reduced the disposition and ordered reconveyance. It held that, once the vehicles and the operating depot had been sold, there was no realistic prospect of the business continuing, so the need for immediate liquidity could not justify a price so far below open-market value. An insolvent company must obtain full consideration for the benefit of its creditors, and the recipient bears the burden of proving adequacy.
Adequate consideration
Lord Hodge, with whom the other Justices agreed, treated the test as objective. The consideration must be not less than would reasonably be expected if persons in the parties’ positions were acting in good faith and at arm’s length. The purchaser’s knowledge of the seller’s distress, obtained through private disclosure, is not relevant. Where the sale is part of an informal winding-up and the company cannot carry out a proper marketing exercise, adequacy is measured against the likely net outcome of a sale by a liquidator or administrator, or by the holder of a standard security, having regard to the duties of those persons to take reasonable care to obtain the best price reasonably obtainable.
On the evidence, the sale of the vehicles and then of the distribution centre was in substance an informal winding-up. There was no justification for an urgent off-market sale on the ground that the business might be saved, and no evidence that NatWest had been asked to permit open-market marketing. Carnbroe led no evidence that enforcement by NatWest, or a sale by a liquidator with NatWest’s consent, would have been likely to produce a net price comparable to or lower than £550,000. The Inner House was therefore entitled to interfere with the Lord Ordinary’s evaluation. The Supreme Court agreed that adequate consideration had not been established, although its reasons were not precisely those of the Inner House.
The remedy
Section 242(4) provides that, unless the transferee establishes one of the statutory defences, 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. Earlier Inner House authority had held that those words conferred no general equitable discretion and required full restoration, leaving a purchaser who had paid substantial but inadequate consideration to claim in unjustified enrichment as an ordinary creditor. Lord Hodge held that those cases should not be followed on that point. The statutory language is broad enough, in an appropriate case and where justice requires it, to allow the court to take account of consideration paid by a purchaser acting in good faith, so as to avoid both disproportionate hardship and an uncovenanted windfall to the creditors. That is not a general discretion to consider the defender’s personal circumstances, nor a power to award damages. It is a power, when restoring property or value, to give credit in some way for the consideration paid.
The liquidators had recognised the lending bank’s security under the proviso to section 242(4). Carnbroe asserted that the original borrowing had since been repaid and that no security now affected the property, but those facts were not agreed. The Supreme Court therefore left the precise form of remedy to be reconsidered.
Verdict: The Supreme Court unanimously allowed Carnbroe’s appeal on remedy alone. The price was inadequate. The First Division had to decide what redress was appropriate and whether an order undoing the transfer should allow for some or all of the money Carnbroe had paid.
Source: MacDonald and another v Carnbroe Estates Ltd (Scotland) [2019] UKSC 57
