UK: A Valuable Decision Of The UK Supreme Court On Scottish Sales At Undervalue

Last Updated: 10 December 2019
Article by Douglas Blyth and Gareth Hale

On 4 December 2019, the UK Supreme Court issued its decision in MacDonald and another as joint liquidators of Grampian MacLennan's Distribution Services Ltd v. Carnbroe Estates Ltd [2019] UKSC 57, a Scottish case involving insolvency and "gratuitous alienations" (sales at undervalue).

The decision is important, firstly, because it clarifies the test for "adequate consideration" under the insolvency rules. Secondly, it represents a significant departure from previous Scottish authority in recognising that the court does have the necessary flexibility to deal with a transaction (found to be a gratuitous alienation) in a way that balances the respective interests of the purchaser and the creditors of the insolvent company.

In this article, we explain the background law, examine the significance of the judgment and consider what might happen next – in this case and more generally.

What are gratuitous alienations?

The rules are complex but, at the most basic level, gratuitous alienations are disposals of property for no or inadequate consideration.

In the event of subsequent insolvency of the seller, a gratuitous alienation made within a certain period prior to the insolvency is challengeable. The challenge can be brought by a creditor or a liquidator of the seller, both at common law and (in the case of companies) under section 242 of the Insolvency Act 1986 or (in the case of individuals) section 98 of the Bankruptcy (Scotland) Act 2016.

When challenged, the onus is on the recipient to establish that the alienation was made for "adequate consideration", or that the seller's assets were greater than its liabilities at the time that it was made.

The principle is that an insolvent party should not be able to reduce the value of its estate to the detriment of its creditors.

What can the court do in the event of a successful challenge?

Under section 242, if the court concludes that there has been a gratuitous alienation, it is obliged to order decree of reduction (so as to reverse the transfer of property) or such "other redress as may be appropriate."

What does that mean in practice?

Let's take a simple example. A company had a property worth £1 million and sold it to Joe Bloggs for £500,000. If a liquidator was subsequently appointed to the company, he may well seek to challenge that transaction as a gratuitous alienation, on the basis the property was sold at undervalue.

Let's say the court agrees. The result, under section 242, would be a reduction of the sale. This would mean that the property would transfer back to the company.

What about the £500,000 – would Joe Bloggs get that back?

This is the interesting (and, some would say, very unfair) point. Joe Bloggs would not get his £500,000 back in exchange for the return of the property. Instead, he would simply have a claim against the company for that money. However, because the company is in liquidation, that claim would simply be an unsecured claim in the liquidation – and would rank alongside all of the other unsecured creditors.

Such creditors normally only get back a few pence in the pound in relation to their claims, so it can readily be seen that the result is harsh on Joe Bloggs – he has spent £500,000, but has no property. Instead, all he has to show for it is a claim worth probably only a tiny fraction of that.

The company's other creditors, by contrast, appear to have received a windfall, as the company has been able to keep the purchase price and get the property back.

In fact, Joe Bloggs would have been better off had he received the property completely gratuitously. In that event, the transfer of the property would still be reversed, but if he had not paid anything for it, he would not be any worse off.

It seems very unfair that someone who has paid at least something for the property would, therefore, be worse off than someone who has paid nothing.

But does section 242 not allow for "such redress as may be appropriate"?

Yes it does. The court is obliged to order decree of reduction or such "other redress as may be appropriate". However, the courts in Scotland have (since the case of Short's Trustee v. Chung in 1991) consistently been of the view that the reference to "other redress as may be appropriate" did not confer on the courts a general discretion as to the nature of the remedy. The court could not, for example, require a liquidator to pay a sum of money for the return of the property.

Rather, the courts have been of the view that the reference to "other redress as may be appropriate" simply gives the courts the power to grant a remedy where reduction is not available.

So what happened in Carnbroe?

In Carnbroe, the Supreme Court was considering the sale of a property for £550,000, in circumstances where it had been valued at between £800,000 and £1.2 million.

The purchaser argued that the property had been sold as part of a "fire sale" in the context of an imminent insolvency of the seller – with the result that it could not be properly exposed to the open market. On that basis, it was suggested that the price received was "adequate".

That suggestion was accepted by the Lord Ordinary at first instance, but was rejected by the Inner House of the Court of Session on appeal – which rejection has been upheld by the Supreme Court.

In so doing, the Supreme Court has given some helpful guidance on how to determine what is "adequate consideration" and stressed the fact that it is an objective test, which requires regard to the commercial justification in the particular circumstances and is assessed on the assumption that the parties to the transaction are acting in good faith and at arm's length.

In this case, the Inner House was of the view that it was not objectively reasonable for the vendor to accept the low price offered as there was, in reality, no fire sale. The business had already stopped trading – it was a distribution company that had sold all of its trucks and was then left with only its premises. A sale of the premises was not required to maintain liquidity to allow it to continue to trade. The Inner House therefore considered the sale to have been at undervalue and ordered the return of the property to the company.

The Supreme Court agreed that the sale was at undervalue.

So, is the purchaser just left with an unsecured claim for the £550,000?

Not necessarily. This is the really important part of the Carnbroe decision.

The Supreme Court has concluded that, contrary to previous Scottish authority, the wording of section 242 is, in fact, broad enough to allow the court to devise a remedy, in appropriate cases, to protect a good faith purchaser from a reversal of a purchase, which would otherwise give the other creditors a windfall at its expense. 

Indeed, the court observed that the general approach to the annulment of transactions requires no more from a fraudster than that he compensate the victim.

The Supreme Court held, in short, that credit could be given under section 242 for the consideration paid by a good faith purchaser – and to the extent that cases such as Short's Trustee v. Chung suggested that the court did not have this power, they were wrongly decided.

The Supreme Court has now handed the case back to the Inner House to determine exactly what remedy should be devised for the liquidators in this particular case.

What is next for the parties involved?

Unless the parties decide to settle the case, it will now be for the Inner House to consider what would be a more appropriate remedy than (unconditional) reduction of the sale. This may not be entirely straightforward. There are several possibilities.

Could reduction of the sale be ordered, but with conditions imposed by the court?

Perhaps the most likely outcome is that the Inner House reduces the sale, but on the condition that the liquidators pay Carnbroe compensation. It would be open to the court to order that the liquidators pay a lower or higher sum than the original £550,000 price.

Could Carnbroe be ordered to sell the property back to the insolvent company?

Yes, a similar potential outcome is that the Inner House could order Carnbroe to sell the property back to the insolvent company at a specified price.

However, this is not without difficulty – what should the price be? The original price of £550,000 could presumably be taken as a starting point, but what if Carnbroe has spent substantial sums improving the property since the date of its purchase? Should it be compensated for any sums that it has spent?

It is also possible that the liquidators have insufficient funds at their disposal to fund a purchase, making such an order impossible to implement.

Could the Inner House allow Carnbroe to keep the property?

Yes, the court could order that Carnbroe be allowed to keep the property, but only on the basis that it pays compensation to the insolvent company, effectively "topping up" the price which it originally paid (£550,000) to an amount which constitutes "adequate consideration".

Assessing what would have been "adequate consideration" may not be straightforward. At proof, the two valuation surveyors who gave evidence suggested a range of different valuations depending upon the precise circumstances of the sale. What circumstances must one assume for the purposes of assessing what would have amounted to "adequate consideration"?

What about Carnbroe's lender? 

Carnbroe had funded the purchase of the property with a loan of £600,000 from a bank. It granted a standard security in favour of the bank at the time of its purchase.

At the hearing before the Supreme Court, it emerged that Carnbroe had refinanced and that there was no longer any standard security over the property.

The Inner House will not, therefore, have to consider the bank's position when deciding what orders are appropriate.

What would have happened if the standard security had still been in place?

In terms of section 242(4), reduction cannot prejudice any right which a third party has acquired in good faith and for value from the purchaser.

Therefore, if the standard security had still been in place and the court ordered the return of the property to the ownership of the insolvent company, the bank would still be entitled to call up its standard security and to sell the property in satisfaction of the debt due to it.

The presence (or otherwise) of a secured lender is, therefore, another factor which the court must take into account when deciding what sort of order it ought to make when unravelling a gratuitous alienation, having regard to the various parties' interests.

What does this decision mean for the wider market?

The decision is good news for the Scottish property market, insofar as it recognises the need to balance, on the one hand, the interests of the creditors of an insolvent company and, on the other hand, the interests of a purchaser in good faith. It is also a welcome decision for lenders.

It remains to be seen how the Inner House will now proceed, based on clear directions from the Supreme Court.

What is clear is that this case has brought Scots law much closer to the law in England and Wales, where the equivalent provision (section 238 of the Insolvency Act 1986) empowers the court to make an order restoring the position to what it would have been if the insolvent company had not entered the transaction at undervalue. It had been something of an anomaly that the interests of a good faith purchaser were treated very differently across the component parts of the UK. 

Challenging gratuitous alienations may now be a less attractive proposition for liquidators, since achieving a windfall for the benefit of creditors will now be unlikely. That said, circumstances are still likely to arise – with considerable frequency – where challenges remain justified and worthwhile.

The old adage for would-be purchasers remains: if a bargain looks too good to be true, it probably is.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions