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It also held a bond and floating charge over Grampians property and undertaking. FAC |
Grampian had to pay monthly loan payments to NatWest of about 4,600. FAC |
In his witness statement, which was accepted as his evidence in chief and truthful and on which he was not cross-examined, Mr Quinn explained that he had taken over Grampian in the hope that he could save it and make money out of it. FAC |
He narrated that shortly after his takeover, Grampians invoice factor withdrew its factoring facility which caused the companys cash flow to collapse. FAC |
He was not able to obtain alternative funding. FAC |
He explained that once he realised how bad Grampians position was, he tried to deal with it in as responsible a way as he could. FAC |
He sold off the companys trucks, which were on hire purchase, to reduce outgoings, and then sought to sell Grampians only other asset, the Property. FAC |
With the collapse in its cash flow, Grampian could not pay the loan payments to NatWest, which fell into arrears. FAC |
He sought to sell the Property to prevent it from being re-possessed by NatWest. FAC |
Mr Quinn entered into discussions to sell the Property with James Gaffney (Mr Gaffney) who was a successful businessman whom he had known for over 30 years and with whom he had had business dealings throughout that time. FAC |
Mr Gaffney tried to chisel the price by pointing out that the electrical system of the building needed immediate attention, and that there was an issue about the presence of asbestos which would have to be addressed at some time. FAC |
Mr Gaffney was aware of Grampians predicament and mentioned that he could buy the Property after it had been repossessed. FAC |
Mr Gaffney also gave evidence in a written witness statement which was accepted as truthful. FAC |
He stated that Carnbroe was one of his family companies and that he negotiated with Mr Quinn on its behalf. FAC |
Mr Quinn had explained to him Grampians financial difficulties on a number of occasions. FAC |
Mr Quinn was looking for a quick sale because of mortgage arrears and the risk that the Property would be repossessed. FAC |
The price of 550,000 reflected the quick sale. FAC |
The buildings needed repairs and refurbishment, including re-wiring and asbestos removal. FAC |
That is all the direct factual evidence that was led about the circumstances which led up to the sale of the Property to Carnbroe. FAC |
The parties sought to adopt an economical and proportionate approach to the proof, which is to be commended. FAC |
In a Joint Minute of Admissions the parties agreed as true the contents of the affidavits of the liquidators and two other witnesses to fact on their behalf. FAC |
The reports of and other documents prepared by the two expert valuation witnesses, Mr Iain Prentice of Colliers International Valuation UK LLP, whom the liquidators called as a witness, and Mr Alastair Buchanan of J & E Shepherd, who gave evidence at Carnbroes request, were admitted as their evidence in chief. FAC |
Both expert witnesses gave brief oral evidence in chief and were cross-examined in a succinct manner. FAC |
The Joint Minute of Admissions also proposed detailed findings of fact on matters which were not in dispute. FAC |
No evidence was led as to the likely price which NatWest could be expected to obtain if it had called up its standard security and sold the Property or which a liquidator of Grampian would be likely to have obtained on its sale in a winding up. FAC |
Grampian transferred the Property to Carnbroe by a disposition dated 24 July 2014 in which the consideration was stated to be 550,000, having agreed an off- market sale. FAC |
Entry was given to the Property on that date. FAC |
Immediately before the sale, Grampian owed NatWest 473,604.68 under the LIBOR loan which was secured over the Property. FAC |
Carnbroe did not pay the agreed consideration of 550,000 but instead, on 18 August 2014, its solicitors paid the sum of 473,604.68 to NatWest in repayment of the LIBOR loan to Grampian and to obtain a discharge of the standard security over the Property. FAC |
Carnbroe did not pay the balance of the stated purchase price to Grampian until 9 June 2016, after the completion of the proof before the Lord Ordinary in this case. FAC |
Carnbroe funded the purchase of the Property by a loan of 600,000 from the Bank of Scotland plc (the Bank). FAC |
In support of its lending, the Bank obtained a report from DM Hall dated 23 June 2014, which confirmed the valuation in its March 2013 report, namely 1.2m on the open market and 800,000 on the assumption of a restricted marketing period of 180 days. FAC |
On 28 July 2014, solicitors for the Bank questioned the discrepancy between the purchase price of 550,000 and the DM Hall valuation. FAC |
Carnbroes solicitor replied by email to the effect that because NatWest were calling for payment under threat of enforcing their securities, there was no willing seller and no willing buyer for the Property and that Grampian did not have the option of a 180 day marketing period. FAC |
The solicitor stated that he had spoken with DM Hall who had confirmed that, as a result, the assumptions made in their valuation did not apply. FAC |
The Bank then made a loan of 600,000 to Carnbroe which was secured over the Property. FAC |
The sale of the Property and the repayment of NatWests LIBOR loan left the other principal creditor, HMRC, unpaid. FAC |
HMRC wrote to Grampian on 6 August 2014 requiring payment of tax that was due. FAC |
On Grampians failure to pay, HMRC presented a petition for winding up Grampian founding on that debt. FAC |
Mr MacDonald was appointed provisional liquidator on 12 September 2014 and on 21 November 2014 he and Ms Coyne were appointed as joint liquidators at a meeting of Grampian creditors. FAC |
The liquidators raised the present proceedings on 28 November 2014. FAC |
I can summarise the valuation evidence shortly. FAC |
Mr Prentices evidence was that the open market value of the Property at the date of the transaction was 820,000. FAC |
Mr Buchanans evidence of the open market value at that date was 740,000. FAC |
The experts both made their valuations on the assumption that the bargain was between a willing seller and a willing buyer at arms length. FAC |
They both assumed a proper period of marketing, which Mr Prentice thought would take between 12 and 24 months and Mr Buchanan thought would be 24 months. FAC |
Both advised that it was appropriate to apply a discount of between 25% and 30% if there were a restricted marketing period of six months. FAC |
Neither considered that a consideration of 550,000 was inappropriate if there were an immediate off-market sale by a financially distressed vendor, in accordance with the factual assumptions which Mr Buchanan was requested to address and addressed in his report. FAC |
The question which has become of central importance in this case is whether there was an objective justification for such an urgent off-market sale, which caused so radical a reduction in the value of the Property in comparison with the open market value. Ratio |
The judgments of the Scottish Courts RLC |
After a two-day proof, the Lord Ordinary held in an opinion dated 18 January 2017 ([2017] CSOH 8) that Carnbroe had established that the sale of the Property was made for adequate consideration. RLC |
He recorded the submission which counsel made on behalf of Carnbroe that Grampian was fighting for its survival and that Mr Quinn had to make a quick decision. RLC |
He continued: 30. RLC |
While the purchase price fell short of the open market value, Grampian had very limited options. RLC |
It was in a perilous financial position. RLC |
It could not afford the leisure of a lengthy marketing period. RLC |
NatWest was threatening to call up the standard security and to use other diligence against it in terms of the bond and floating charge it held. RLC |
There was no other offer on the table. RLC |
The earlier expressions of interest were just that. RLC |
There was no solid proposal to accept. RLC |
31 RLC |
Carnbroes offer presented an opportunity to obtain a quick sale. RLC |
To place the property on the open market would have involved significant expense. RLC |
There would have been advertising costs and an estate agency fee of 1% to 1.5%. RLC |
There was no clear indication that a sale would be achieved within the standard marketing period of 12 to 24 months. RLC |
According to the surveyors evidence, a stigma can attach to a property that remains on the market too long. RLC |
It might be the subject of vandalism. RLC |
He went on the state that Mr Quinn and Mr Gaffney were not associates in terms of the relevant legislative definition, but their long business relationship justified close scrutiny of the transaction. RLC |
The expert surveyors had agreed that a price of 550,000 was not inappropriate if the Property had been marketed on a closed basis for six months. RLC |
The liquidators appealed to the Inner House. RLC |
In an opinion and interlocutor dated 23 January 2018 the First Division (the Lord President, Lord Drummond Young and Lord Malcolm) ([2018] CSIH 7) allowed the reclaiming motion, reduced the disposition of the Property and ordered Carnbroe to execute a disposition of the Property in favour of the liquidators. RLC |
In the opinion of the Court, which Lord Drummond Young delivered, the First Division recorded its view (para 11) that the most important issue in the appeal was whether it was correct to assert that a quick sale was justified because Grampian had an immediate need for funds. RLC |
The First Division concluded that it was not. RLC |
Analysing the facts found by the Lord Ordinary, the Court identified four factors which were of central importance, namely Grampians severe financial difficulties when the finance house withdrew its invoice factoring facility, Grampians balance sheet insolvency, the sale of the trucks on which Grampian depended to prov... |
The First Division concluded that on an objective analysis there was no realistic prospect that Grampians business could continue in existence after the sale of those assets (para 30). RLC |
In consequence, this was not a case in which the achievement of a quick sale of the Property would save the companys business. RLC |
In its legal analysis of the principles of insolvency law the First Division (paras 12-20) stated that a person, once he or she became insolvent, owed a fiduciary duty to have regard to the interests of his or her creditors and as a result, if a debtor alienates property once he or she is insolvent, he or she must obta... |
The First Division pointed out that under the current and prior statutory provisions relating to gratuitous alienations the burden of proving that full consideration had been given rested on the recipient of the insolvent debtors property. RLC |
The same principles applied to a corporate insolvency in which directors of an insolvent company owed analogous fiduciary duties to have regard to the interests of the companys creditors as a body. RLC |
As a result, the courts should take a relatively strict view of the adequacy of consideration (para 24). RLC |
The First Division distinguished balance sheet insolvency (ie an excess of liabilities over assets) with cash flow insolvency (ie the inability of a trading entity to meet its debts as they fall due). RLC |
It recognised both that an urgent forced sale, necessitated by a trading entitys need for cash to maintain liquidity in order to continue to trade, would generally result in a lower price than a sale in ordinary market conditions and that the need to maintain liquidity and stay in business could be a relevant factor in... |
But if an insolvent trading entitys business was about to come to an end, there was no need to maintain liquidity and the paramount importance of the interests of the creditors prevailed over any need to pay debts as they fall due. RLC |
The First Division stated (para 25): For these reasons we are of opinion that the need for a forced sale to provide immediate liquidity is not normally a factor that should be taken into account in determining the adequacy of consideration obtained for a sale of the debtors assets in any case where the debtor has cease... |
As a result, if a trading entity sold its principal asset, such as its principal place of business, the court would have to scrutinize the companys commercial situation in order to determine whether it was realistic for it to continue to trade (para 26). RLC |
Carnbroe appeals to this court with this courts permission. FAC |
In presenting Carnbroes appeal, Lord Davidson of Glen Clova QC makes three submissions. FAC |
He submits that the central issue is whether the insolvent companys financial distress justified an urgent sale and that the Lord Ordinary reached a conclusion which was open to him on the evidence. Ratio |
The First Division therefore erred in interfering with his evaluation. Ratio |
It erred in placing a gloss on the statutory words and requiring a strict approach to the assessment of any departure from open market value when the alternative facing Grampian was a sale by the standard security holder or a sale by a liquidator, both of which could be categorised as a forced sale. Ratio |
The Lord Ordinary made no findings as to the likely outcome of such sales, which were the appropriate comparators. Ratio |
Secondly, the First Division erred in identifying the applicable legal policy. Ratio |
Lord Davidson does not challenge the proposition that an insolvent company is in substance a trustee for its creditors but submits that a countervailing consideration is that the law should facilitate commercial transactions and promote commercial certainty. Ratio |
What the statute requires is the striking of a just balance between the creditors interests and the interests of those contracting at arms length with an insolvent company. Ratio |
The test of adequate consideration takes account of both interests. Ratio |
He refers by way of analogy to statutory provisions in English law (section 238 of the 1986 Act) and in Australian law (sections 588FB, 588FC and 588FF of the Corporations Act 2001) and submits that the test is whether the transaction was a commercial one which was satisfactory in all the circumstances rather than, as ... |
Thirdly, he submits that the First Divisions judgment lacks commercial practicability: a purchaser in a commercial deal looks after its own interests and is entitled to exploit a vendors financial distress to obtain a favourable price in an arms length transaction. Ratio |
Sales at less than open market value are the norm where there are problems with liquidity. Ratio |
But the purchaser cannot know whether the vendor in pursuing an urgent sale has a realistic possibility of preserving its business or is otherwise acting in the interests of its creditors. Ratio |
If the First Divisions analysis were correct, prudence would require the purchaser to refuse to deal with a company in distress and instead wait to see if a formal insolvency eventuated which would enable it safely to purchase from a liquidator. Ratio |
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