Gratuitous alienation is one of the most familiar parts of our law and yet relatively rarely seems to come to court. That may be because the law is so well understood that there is little left to debate and so, although disputes frequently arise, the outcome is often so predictable that out of court settlements are common.
The case of The Liquidators of Grampian MacLennan's Distribution Services Limited v Carnbroe Estates Limited [2017] CSOH8 is however one that made it to the Outer House.
It did so on the question of the meaning of "adequate consideration" in section 242 of the Insolvency Act 1986.
Put very briefly the disposal of an asset cannot be challenged successfully as a gratuitous alienation if adequate consideration has been paid. The difficulty of course comes in deciding what constitutes "adequate consideration".
In Grampian, four or five months before the commencement of liquidation, a company sold property for £550,000. The liquidator challenged that transaction as a gratuitous alienation alleging that the price was not adequate consideration for the purposes of section 242.
Lord Woolman was called upon to determine whether the price of £550,000 for the sale in July 2014 constituted adequate consideration having regard to the following facts:-
- the property had originally been purchased in 2005 for £630,000;
- previous valuations (in 2009 and 2013) suggested values of £1.2m – £1.3m (open market valuation) or £800,000 (if only limited marketing were undertaken);
- a bank holding a standard security and floating charge securing £550,000;
- the bank giving very strong signals that it intended to take enforcement action against the borrower.
Lord Woolman decided in the circumstances that the consideration was "adequate". The fact that this was very much a distress sale was clearly important in his decision. It is clear that "adequate consideration" does not mean "market value" but on the other hand it is not a subjective test either. In evidence, two independent surveyors indicated that they "wouldn't raise an eyebrow" at a price of £550,000 in these circumstances. This gave comfort to Lord Woolman in determining that the consideration could be considered adequate.
Of course this is not approval for the sale of assets at any price simply because a company is facing difficulties. The facts in this case supported a sale at £550,000. Indeed, for reasons relating to the manner in which the price was paid, Lord Woolman noted in passing that he would have held that a price of c.£470,000 was inadequate consideration.
So, perhaps not ground breaking stuff but at least some guidance as to what may or may not constitute a gratuitous alienation.
Perhaps the test is really whether a surveyor would raise a quizzical eyebrow or not.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
