MacDonald and another v Carnbroe Estates Ltd (Scotland)

Whether consideration is adequate under section 242(4)(b) of the Insolvency Act 1986 is determined objectively in all the circumstances. The assumed parties act in good faith and at arm’s length. A distressed seller’s undisclosed financial position cannot ordinarily justify a reduced price.

The appropriate comparator depends on the transaction’s objective purpose and the seller’s circumstances. It may be a properly marketed sale or, where that is beyond the insolvent company’s control, the likely net outcome of sale by an insolvency practitioner or secured creditor.

Section 242(4) does not confer a general equitable jurisdiction, but it permits a remedy crediting consideration paid by a bona fide purchaser where necessary to prevent a disproportionate windfall.

Grampian MacLennan’s Distribution Services Ltd, while insolvent, sold its principal property to Carnbroe Estates Ltd for £550,000 in an urgent off-market transaction. Expert valuations of its open-market value were substantially higher. Grampian’s liquidators challenged the disposition as a gratuitous alienation under section 242 of the Insolvency Act 1986.

The Lord Ordinary held that Carnbroe had established adequate consideration: [2017] CSOH 8. The First Division allowed the liquidators’ reclaiming motion, reduced the disposition and ordered its reconveyance: [2018] CSIH 7.

The Supreme Court considered the meaning of adequate consideration, the First Division’s interference with the Lord Ordinary’s evaluation, and whether section 242(4) permitted the remedy to recognise consideration paid by a bona fide purchaser.

1. Appeal allowed to a limited extent. Carnbroe failed to establish adequate consideration, but the case was remitted to the First Division to determine the appropriate remedy under section 242(4) of the Insolvency Act 1986. Lord Hodge gave the unanimous judgment.

2. The transferee bears the burden of establishing adequate consideration. The test is objective and considers the commercial justification for the transaction in all the circumstances. It assumes parties in the positions of the insolvent and transferee acting in good faith and at arm’s length. The hypothetical purchaser does not know of the seller’s financial distress unless it is known in the relevant market. The actual purchaser cannot justify a reduced price by exploiting a private disclosure of distress.

3. An insolvent seller must protect creditors. A prompt sale at a reduced price may be reasonable where it offers a genuine chance to preserve liquidity and continue the business. Where the company is instead disposing of the assets needed for its business, the transaction forms part of an informal winding up. Adequacy is then assessed against a properly marketed sale or, if circumstances beyond the company’s control prevent that exercise, the likely net outcome of sale by a liquidator, administrator or secured creditor.

4. Grampian had sold its vehicles and distribution centre and was effectively winding up informally. Urgency could not be justified by preservation of the business. Carnbroe produced no evidence that £550,000 was comparable to the likely net proceeds of sale by NatWest or a liquidator. The First Division was therefore entitled to reverse the Lord Ordinary’s assessment.

5. Section 242(4) requires the court to provide one or more of the specified forms of redress. Annulment remains the primary remedy, and the provision creates neither a general equitable jurisdiction nor a power to award damages. Its broad language nevertheless permits credit for consideration paid by a bona fide purchaser where justice requires it. Short’s Trustee v Chung and Cay’s Trustee v Cay were wrongly decided and should not be followed insofar as they denied that power.

6. The facts concerning repayment and refinancing of Carnbroe’s secured borrowing were not agreed. The First Division was therefore to consider whether reduction should be qualified, for example by requiring the liquidators to pay a specified sum to Carnbroe as a condition of reduction.

1. United Kingdom Supreme Court: Allowed Carnbroe’s appeal only to the extent of remitting the case to the First Division to reconsider the appropriate remedy under section 242(4) of the Insolvency Act 1986: [2019] UKSC 57.
2. Inner House of the Court of Session, First Division: Allowed the liquidators’ reclaiming motion, reduced the disposition and ordered Carnbroe to dispone the property to the liquidators: [2018] CSIH 7.
3. Outer House of the Court of Session: The Lord Ordinary held after proof that Carnbroe had established adequate consideration: [2017] CSOH 8.