Brown and another, the Joint Administrators of Loanwell Limited v Stonegale Limited

The Supreme Court considered the scope and application of section 242 of the Insolvency Act 1986 (as amended). Section 242(1) permits an administrator to challenge an alienation by the company made on a relevant day; section 242(2)-(3) define the scope and timing; and section 242(4) requires the court to grant reduction or restoration unless adequate consideration is established.

The administrators challenged four dispositions made in the nine months before administration. The court upheld the factual findings below that the transfers were contrived, recorded false consideration, and in reality were gratuitous alienations designed to place assets beyond the reach of creditors. The Supreme Court held that those gratuitous alienations were within the scope of section 242 and could be set aside. The appellants' argument that alternative remedies should have been pursued, or that the transactions were supported by consideration arising from a prior payment, did not prevent the administrators obtaining relief under section 242.

Background and parties: Three conjoined Scottish appeals concerned administrators of several group companies who challenged a series of transfers of property made in the period before the companies entered administration. The respondents were the joint administrators of Oceancrown Ltd, Loanwell Ltd and Questway Ltd; the appellants were Stonegale Ltd and Mr Pelosi junior.

Facts:

• A high-value sale of 278 Glasgow Road produced proceeds which were used to obtain discharges of the bank's standard securities over five properties.
• Strathcroft acted as a short-lived intermediary in the disposal of 278 Glasgow Road; the bank was misled as to the allocation of sale proceeds.
• The four other properties were then conveyed to the appellants on documents recording consideration but in reality for no payment; a purported loan agreement was found to be a sham.

Nature of the claim / relief sought: The administrators sought relief under section 242 of the Insolvency Act 1986, namely reduction (setting aside) of the dispositions and restoration of the properties to the insolvent estates.

Issues framed: Whether the dispositions were alienations on a relevant day within section 242; whether the disposals were gratuitous; whether adequate consideration had been provided so as to defeat a s.242 challenge; and whether the administrators had chosen the wrong remedy because alternative causes of action or challenges were available.

Court's reasoning and subsidiary findings: The Lord Ordinary found, and the Inner House and Supreme Court accepted, that (i) the dispositions fell within the temporal and substantive scope of section 242; (ii) Strathcroft was merely an intermediary and the bank had been misled about the source and application of the funds; (iii) the four challenged transfers involved no real consideration to the transferors and were gratuitous; and (iv) that gratuitous alienations intended to divert assets from creditors are exactly the conduct section 242 is designed to prevent. The Supreme Court rejected the appellants' arguments that alternative remedies should have been pursued or that the earlier payment to the bank constituted consideration for the subsequent transfers.

Procedural posture: The Lord Ordinary set aside the dispositions and ordered restoration; that decision was upheld by an Extra Division of the Inner House ([2015] CSIH 12). The appellants appealed to the Supreme Court, which dismissed the appeal.

The appeal is dismissed. The Supreme Court held that the four dispositions were gratuitous alienations made on relevant days within section 242 of the Insolvency Act 1986 and could be set aside; alternative remedies available to the administrators did not preclude relief under section 242, and the contention that adequate consideration existed was rejected.

First instance: decision of the Lord Ordinary (Scotland) (findings of fact and decree of reduction). That decision was upheld by an Extra Division of the Inner House ([2015] CSIH 12). Appeal to the Supreme Court ([2016] UKSC 30) dismissed.