Having worked its way through the Outer House and the Inner House of the Court of Session, the Supreme Court heard a further appeal in February and the judgement has now been released. In out rightly rejecting the appeal, all Judges unanimously agreed the fact "that they were gratuitous alienations is plain and obvious".
Background to Actions:
The background of the action is complex but makes for interesting reading. The Joint Administrators of Oceancrown Ltd, Loanwell Ltd and Questgate Ltd sought to challenge transfers of company property that were made prior to their appointment. The challenges were made in terms of Section 242 of the Insolvency Act 1986 (the "Act"), which provides a mechanism for administrators and liquidators to challenge alienations of company property that are made within the 2-5 years prior to their appointment. Section 242 stipulates that any such action can be successfully defended if the defender can establish that the alienation was made for adequate consideration.
In terms of the actions, the Administrators sought decree of reduction and restoration to the companies of several properties which were sold to related companies prior to the Administrators' appointment. The factual history of the transfers is somewhat complicated and perhaps best explained via a diagram:
Mr Pelosi was the beneficial owner of all the companies in Adminsitration. He also owned 99% of Strathcroft Ltd. His Son, Mr Peolsi Junior, was the sole owner and director of Stonegale Ltd, Clydegate Developments Ltd and John Lozari were unrelated parties. Prior to the appointment of administrators, Mr Peolsi effectively had control of all 3 companies, which he operated as 1 enterprise. Oceancrown had a £17.3 million security with the Anglo Irish Bank, with cross-company guarantees granted by Loanwell & Questway. Anglo Irish Bank had securities over all the properties.
Prior to November 2010, Mr Pelosi Senior, on behalf of Oceancrown Ltd, concluded an agreement to sell 278 Glasgow Road to Clyde Gateway Ltd for £2,467,500. On 10 November, 2 transfers of 278 Glasgow Road took place. Firstly, Oceancrown sold 278 Glasgow Road to Strathcroft (related co) and the disposition recorded a sale price of £762,000. Secondly, Strathcroft sold it to Clyde Gateway Developments for the agreed £2,467,500.
The solicitor acting for the companies advised Anglo Irish Bank that 278 Glasgow Road had been sold as part of a wider series of property transfers and that all 5 properties noted above had been sold for a grant total of £2,414,000, conveniently a slightly lower figure than that received from Clyde for the sale of 278 Glasgow Road. A breakdown of the alledged sale prices was provided and as such, the Bank discharged the securites over all the properties.
The Court of Session Decisions
In the action the Administrators argued that money received from Clyde Gateway was allocated against other dispositions to give the appearance that the other properties had been transferred for value when they had not. This argument was acccepted by Lord Malcolm in the Outer House and upheld by a bench of 3 judges in the Inner House. Lord Malcolm held that nothing was paid for 4 of the properties and granted reduction of 3 dispositions and repayment of £125,000 in relation to the fourth.
The Supreme Court Decisions
The judges of the Supreme Court were also of a like mind. In the Supreme Court, the appellants/defenders argued that the Administrators could have pursued a number of alternate remedies, for example, they could have challenged th alienation of 278 Glasgow Road but they did not. They could also have proceeded against the compamny director for breach of fiduciary duty but they did not. The appeallant/defender argued that in failing to challenge the transfer of 278 Glasgow Road to Strathcroft, the Administrators could not challenge the transfer by Strathcroft to Clyde Gateway. The Supreme Court did not entertain these arguments and held that the Administrators were entitled to the remedy which they sought and reiterated the view of the Lord Ordinary at first instance, who held that no one paid anything for 110, 210, 260 Glasgow Road and 64 Roslea Drive. In Lord Reed's judgement, with which all the other judgeds agreed, he stressed that the purpose and effect of the transactions was to divert asssets away from the companies' creditors: exactly what Section 242 of the act was intended to prevent.
The Supreme Court judgement sends a clear messages that gratuifious alienations of assets will not be tolerated and suggests a preference for the phiscal facts of the transfers, rather than the 'background accounting'. The Decision is likely to be welcomed by Insovency Practitioners as there is a clear inference from the Court that there are a number of recovery options available to them in such circumstances and they may choose which of these options they wish to rely on, including S242 of the Act and actions against directors for breach of duties.
Associate for DWF LLPThis information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.