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

An alienation is gratuitous for the purposes of Insolvency Act 1986 section 242 where the company receives nothing in return and there is no reciprocity between the alienation and an earlier transaction said to constitute consideration. A consequential reduction in the company’s contingent liabilities does not constitute consideration for a later disposal when it was merely part of a mechanism enabling assets to be transferred beyond creditors’ reach.

The availability of alternative remedies does not prevent an administrator from challenging such an alienation under section 242. The relevant question is whether the statutory remedy sought is available on the facts.

These three conjoined appeals concerned dispositions of four Glasgow properties by Oceancrown Ltd, Loanwell Ltd and Questway Ltd nine months before the companies entered administration. The properties, worth £1.525m, had been released from bank securities after the bank was misled into treating proceeds from the sale of a different property as the purchase price for all five properties. The four properties were then transferred to Stonegale Ltd or Mr Pelosi junior without payment.

The joint administrators challenged the dispositions as gratuitous alienations under section 242 of the Insolvency Act 1986. The Lord Ordinary ordered appropriate restoration and repayment. The Inner House upheld that decision in [2015] CSIH 12.

The central issue was whether the reduction of the companies’ contingent liabilities to the bank amounted to adequate consideration for the later dispositions, and whether the administrators had selected an unavailable remedy.

1. The appeals were dismissed unanimously. Lord Reed delivered the judgment, with which Lord Neuberger, Lord Sumption, Lord Carnwath and Lord Hodge agreed. The administrators were entitled to challenge the four dispositions as gratuitous alienations under section 242 of the Insolvency Act 1986.

2. Before the transactions, the companies owned five properties. A sale of one property, 278 Glasgow Road, had been agreed for approximately £2.4m. After that sale was completed, £2.4m was transferred to the bank in reduction of borrowings. The companies nevertheless retained the other four properties, valued at £1.525m, until they conveyed them to the appellants without receiving anything in return.

3. The reduction of the companies’ contingent liabilities did not constitute consideration for the four later dispositions. There was no reciprocity between those dispositions and the earlier payment to the bank. That payment was a mechanism by which the bank was induced to discharge its securities, enabling the four properties to be transferred gratuitously and placed beyond the reach of creditors. The dispositions therefore fell within the mischief which section 242 was intended to prevent.

4. The fact that the administrators might have pursued other remedies did not establish that their chosen remedy was unavailable. Possible alternatives included challenging the earlier transfer of 278 Glasgow Road, pursuing a director for breach of fiduciary duty, or leaving the bank to seek damages for fraudulent misrepresentation. The court’s task was confined to deciding whether the administrators were entitled to the remedy actually sought. That remedy neither challenged the disposal of 278 Glasgow Road nor depended on whether that disposal had been at an undervalue.

5. The conclusion that the four dispositions were gratuitous was plain. The decisions of the Lord Ordinary and the Inner House were upheld.

1. United Kingdom Supreme Court: The three conjoined appeals were dismissed unanimously. The court upheld the conclusion that the four dispositions were gratuitous alienations challengeable under section 242 of the Insolvency Act 1986.

2. Inner House of the Court of Session: In [2015] CSIH 12, an Extra Division upheld the Lord Ordinary’s decision. It rejected the appellants’ adequate-consideration argument for the same reasons as the Lord Ordinary.

3. Outer House of the Court of Session: The Lord Ordinary held that the challenged dispositions were gratuitous. He proposed to reduce the dispositions to Stonegale Ltd, require restoration of the properties, and order Mr Pelosi junior to repay £125,000 received from the sale of the fourth property.