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A liquidator is under a fiduciary duty to the company, and possibly its creditors as a class, to exercise the professional care and skill of an insolvency practitioner in realising the assets of an insolvent company: Hague v Nam Tai Electronics Inc [2008] UKPC 13; [2008] BCC 295; Oldham v Kyrris [2003] EWCA Civ 1506; [... |
The liquidator must take reasonable care in choosing the time at which to sell the property and must also take reasonable care to obtain the best price that the circumstances of the case, as he reasonably perceives them, permit: In re Charnley Davies Ltd (No 2) [1990] BCLC 760, 775-776 per Millett J; Silven Properties ... |
The holder of a standard security is under a statutory duty when selling the security subjects: to advertise the sale and take all reasonable steps to ensure that the price at which all or any of the subjects are sold is the best that can reasonably be obtained. Ratio |
(Conveyancing and Feudal Reform (Scotland) Act 1970, section 25) Ratio |
In my view, where the directors of an insolvent company are conducting an informal winding up by disposing of the companys assets and are unable as a result of circumstances beyond their control to carry out a full marketing exercise, the sale should be measured against that standard. Ratio |
Lord Davidson accepts the approach of comparing a private sale with a sale in a winding up or a sale by the holder of the standard security in his submission to the court that the Inner House has erred in adopting a comparison with the open market value. Ratio |
But it is necessary to have regard to these duties imposed on the insolvency practitioner and the holder of a standard security when making the comparison which he advocates. Ratio |
iii) The application of the law to the facts of this case Ratio |
It is clear from the evidence of Mr Quinn that after Grampians invoice factor withdrew its factoring facility, he was not able to obtain alternative funding and so disposed of the assets by which Grampian carried on its business. Ratio |
The sale of the Property, which was Grampians distribution centre, following the sale of its vehicles was in effect part of an informal winding up of the business. Ratio |
There is no justification for the off-market sale of the Property at a price so far below market value on the ground of urgency. Ratio |
There was no evidence that Grampian had sought NatWests agreement that it should place the property on the open market. Ratio |
Even if one can infer from Mr Quinns evidence that such a marketing exercise was not possible, Carnbroe has not established that there was adequate consideration as it led no evidence to support the view that a sale by NatWest or a sale by the liquidator with NatWests consent would have been likely to achieve a price n... |
The Inner House was therefore entitled to interfere with the Lord Ordinarys assessment as to whether there had been adequate consideration. Ratio |
In reaching this view, I have sympathy for the predicament of the Lord Ordinary as Carnbroe ran its defence on the basis that an urgent sale was required to preserve Grampians business and it does not appear from the pleadings and written submissions which were provided to this court that the liquidators legal team cha... |
It does not appear that they argued, as they did in the Inner House, that the evidence did not support the justification of the discounted price on the basis of urgency because Grampians business was at an end. Ratio |
If there were such a failure, it might in other circumstances have justified a modification of an award of expenses. Ratio |
But in this case Carnbroes failure to pay the whole of the contracted purchase price until after the proof had been completed caused the Lord Ordinary to award expenses in favour of the liquidators, notwithstanding that they lost before him. Ratio |
There is therefore no basis for interfering in the award of expenses at first instance. Ratio |
Absent evidence that the 550,000 which Carnbroe eventually paid for the Property was equivalent to the price which NatWest or a liquidator would be likely to obtain for the Property after deduction of the likely expenses of sale and other costs incurred as a result of a delay in achieving the sale, Carnbroe failed to e... |
I therefore agree with the conclusion of the Inner House, albeit for reasons which are not precisely the same. Ratio |
That would be sufficient to dispose of the appeal if the question of remedies had not arisen in debate. Ratio |
I therefore turn to that question. Ratio |
iv) The statutory remedies Ratio |
To provide context for discussing the remedies which the court can give to reverse a gratuitous alienation, it may be useful to summarise the position. Ratio |
First, at common law and under the 1986 Act it is not a condition of a challenge to a transaction that either the transferor or the transferee has knowledge of the transferors insolvency. Ratio |
Where the alienation that is wholly gratuitous is made by an insolvent to his or her family or to a close business associate one would expect in the normal course that the insolvent transferor and the transferee would have some knowledge of the transferors financial difficulty. Ratio |
But no such knowledge need be proved. Ratio |
Secondly, the 1985 statutory reforms for the first time have imposed on a transferee, who is not an associate of the insolvent transferor, the burden of establishing the circumstances in section 242(4) which exclude the courts power to reverse the alienation. Ratio |
This is a point to which I will return in para 62 below. Ratio |
Thirdly, the test for adequate consideration is an objective test which takes account of all the circumstances, including circumstances of which one or both of the parties to the transaction may not have been aware, such as the transferors insolvency and the objective purpose of the transaction. Ratio |
There is therefore a significant risk that a bona fide purchaser without knowledge of the sellers insolvency or the reason why the seller is willing to sell at a price substantially below open market value may be exposed to a challenge which he or she cannot defend. Ratio |
It is not realistic in a commercial negotiation to expect a purchaser to ask a seller why he or she is not demanding a higher price. Ratio |
It was this concern that caused the court during the hearing to raise the question of the courts discretion in giving a remedy under section 242(4) of the 1986 Act. Ratio |
In response, counsel referred the court to three cases which addressed the equivalent provision in personal bankruptcy (section 34(4) of the Bankruptcy (Scotland) Act 1985), which provided that on a challenge being brought the court shall grant decree of reduction or for such restoration of property to the debtors esta... |
In the first, Shorts Trustee v Chung 1991 SLT 472, a man purchased two flats at a significant undervalue from an insolvent and conveyed them for no consideration to his wife. PRE |
The insolvents permanent trustee successfully challenged the sales as gratuitous alienations. PRE |
Before the Lord Ordinary and on a reclaiming motion to the Second Division the wife, whose husband had died before the challenge, submitted that the court had a discretion under section 34(4) to make an appropriate order, which, she submitted, was not a reduction of the dispositions but an order for payment of the diff... |
It does not appear that the wife, who as the ultimate transferee was the defender of the action, argued that it was inequitable to reduce the dispositions because she would not be able to recover the (inadequate) consideration paid. PRE |
This may be because her husband had paid the consideration and she had been a gratuitous disponee of the flats from him. PRE |
It is not clear from the report that she had title to seek repetition of the price which he had paid. PRE |
The argument of her counsel was that it was inequitable to reduce the dispositions (a) because the wife would rank as a postponed creditor in the insolvency under section 51(3)(c) of the Bankruptcy (Scotland) Act 1985, which governed her right to recover the properties or the proceeds of their sale and (b) because the ... |
The Second Division (the Lord Justice-Clerk (Ross) and Lord McCluskey and Lord Sutherland) upheld the trustees contention that the section did not give the court a general equitable discretion and that the statutory words, or other redress as may be appropriate, were designed to enable the court to make an appropriate ... |
In the opinion of the court, which Lord Sutherland delivered, it is stated at p 476: The starting point in a case of this nature for interpretation of section 34(4) is that the original alienation has been avoided and the transaction has been vitiated. PRE |
This is not a good starting point for an argument which is based solely on equity. PRE |
It is in our opinion clear from a reading of section 34(4) that the general purpose is to provide that as far as possible any property which has been improperly alienated should be restored to the debtors estate. PRE |
In the case of a disposition of heritable property this can easily be done by reduction of that disposition. PRE |
We consider that the reference to other redress as may be appropriate is not intended to give the court a general discretion to decide the case on equitable principles but is designed to enable the court to make an appropriate order in a case where reduction or restoration of the property is not a remedy which is avail... |
The Second Division (the Lord Justice-Clerk (Cullen) and Lord McCluskey and Lord Morison) confirmed this approach in the second case, Cays Trustee v Cay 1998 SC 780. PRE |
In that case an insolvent transferred to his wife 34,885.11, which were the proceeds of sale of his share of a fishing licence. PRE |
In response to a challenge by the insolvents permanent trustee, she argued (i) that she had given adequate consideration because she had undertaken in return to pay and had paid certain of his debts amounting to over 20,000 and had undertaken to use the balance of the sum transferred to pay household bills. PRE |
The court accepted that the undertaking to pay 20,000 towards the insolvents debts was consideration but rejected the submission that the use of the balance to pay household bills could be treated as consideration as she was under a pre-existing statutory duty to aliment her insolvent husband. PRE |
The court held that the undertaking to pay and payment of 20,000 was not adequate consideration and rejected her alternative argument that she was entitled to set off that sum against the demand for repayment of the sum which she had received, holding that section 34(4) did not confer a general equitable jurisdiction o... |
The court stated at p 788: We consider the court in Shorts Trustee v Chung correctly held that the section did not create any general discretion to decide on equitable principles to order something less than a full return of the alienated property. PRE |
The third case, Baillie Marshall Ltd v Avian Communications Ltd 2002 SLT 189, is an opinion of Lord Kingarth in the Outer House on a challenge to an unfair preference under section 243 of the 1986 Act, in which subsection (5), providing for remedies, is in substantially the same terms as section 34(4) of the Bankruptcy... |
In this case an insolvent company transferred its assets and business to the defender for a consideration which included the payment of the debts of the transferor companys trade creditors but not its other creditors. PRE |
The liquidator did not seek to annul the alleged unfair preferences to recover funds from the trade creditors who had been paid their debts but concluded for payment by the defender of damages measured by the alleged loss to the remainder of the unsecured creditors. PRE |
Lord Kingarth held that such a remedy was not available under section 243. PRE |
Referring to Shorts Trustee v Chung and Cays Trustee v Cay, he stated, at para 22: It seems to me to be reasonably clear, notwithstanding the apparent width of the language of subsection (5) (in particular or other redress as may be appropriate) that the purpose of the section as a whole is to enable the liquidator (am... |
There would appear to be no doubt that the primary remedies envisaged are reduction and restoration of property, and that the words or other redress as may be appropriate properly fall to be construed as relating to redress of the same character, and do not give the court a general equitable jurisdiction. PRE |
I am satisfied that the provisions in the 1986 Act providing remedies against gratuitous alienations (section 242(4)) and unfair preferences (section 243(5)) and the equivalent provisions in the bankruptcy legislation do not confer a general equitable jurisdiction. Ratio |
It is clear from the law before the 1985 statutory reforms that the principal remedy available in challenges to both gratuitous alienations and unfair preferences was the annulment of the impugned transaction. Ratio |
That remains the primary remedy after the 1985 statutory reforms. Ratio |
There is a strikingly contrasting juxtaposition in the Bankruptcy (Scotland) Act 1985 of the remedies made available to reverse gratuitous alienations and unfair preferences (sections 34(4) and 36(5) respectively) and the wider power which section 35 conferred on the court to recall an order made against the insolvent ... |
In contrast with sections 34(4) and 36(5), the court was enabled under section 35, when deciding whether to order the repayment of the whole or part of a sum paid or property transferred, to have regard to the whole circumstances including the financial and other circumstances of the person against whom the order would... |
This conferred a general equitable jurisdiction which the statutory remedies for gratuitous alienations and unfair preferences do not entail. Ratio |
It is also well established that the transferee of a gratuitous alienation or the recipient of an unfair preference cannot set off sums due to it by the insolvent for different purposes as that would defeat the purpose of sections 242 and 243 of the 1986 Act: Raymond Harrison & Cos Trustee v North West Securities Ltd 1... |
But commentators on the statutory provisions have criticised the disproportionate consequence of annulling the transaction when the transferee has paid a significant albeit inadequate sum for the alienated property and is made to rank as an ordinary creditor in relation to his claim for unjustified enrichment: St Clair... |
An order for the restoration of the property to the insolvent company, which leaves the transferee to prove in competition with other creditors for the price which it originally paid, not only is harsh on the transferee but also gives the general body of creditors an uncovenanted windfall as the company would not have ... |
Lord Davidson and Mr Brown in their written submission for Carnbroe point out the anomalous results to which Shorts Trustee can give rise. ARG |
They set out four circumstances. ARG |
First, if an insolvent dispones heritable property gratuitously to a transferee, who holds it when the liquidator mounts a challenge under section 242, reduction is available and the company receives back the property but obtains no windfall at the transferees expense. ARG |
Secondly, if the gratuitous transferee sells the property to a bona fide third party for full value before the liquidators challenge, the court would grant other redress which would be an order to account to the liquidator for the value of the alienated property obtained in that sale. ARG |
This would achieve essentially the same financial outcome as reduction in the first example. ARG |
If, thirdly, the transferee paid a consideration for the property which was substantial but was not adequate consideration, reduction of the disposition would have the effects which I discussed in para 51 above: the creditors receive a windfall and the transferee is significantly worse off than if it had declined to pu... |
Fourthly, if the purchaser/transferee in the third example has sold on to a bona fide third party for full value before the liquidator mounts a challenge, the court could only order other redress. ARG |
The court would have the power to order the payment to the insolvent estate of the shortfall of consideration in the original sale; the court would not have to order the purchaser/transferee to disgorge the whole of the onward sale price and rank as an unsecured creditor for the repayment of the price which it had paid... |
Is the court constrained to interpret section 242 of the 1986 Act so as to compel such a harsh and anomalous result as mentioned in para 51 above when there is a sale at an undervalue? In my view it is not. Ratio |
The words themselves (the court shall grant decree of reduction or for such restoration of property to the companys assets or other redress as may be appropriate) do not compel such an interpretation. Ratio |
The statutory phrase does not speak of the court granting remedy X, which failing remedy Y. I do not see the eiusdem generis principle as a helpful tool in this case where the list comprises only two specific decrees. Ratio |
Further, the use of or cannot have been intended to be exclusively disjunctive as there will be cases where an insolvency practitioner seeks the restoration of different types of property in the same action and may have conclusions for the reduction of dispositions and the reconveyance of heritable property as well as ... |
I would read or in its context as being both conjunctive and disjunctive (ie and/or). Ratio |
In my view the statutory words are broad enough to allow the court to take account of the consideration which a bona fide purchaser has paid the insolvent in devising an appropriate remedy. Ratio |
Mr McBrearty QC and Ms Ower for the liquidators in their post-hearing written submissions advance two principal arguments against this conclusion. ARG |
First, they rely on rule 4.66 of the Insolvency (Scotland) Rules 1986, which has been re- enacted as rule 7.27 of the Insolvency (Scotland) (Receivership and Winding Up) Rules 2018 for the contention that the transferee, which is subjected to a reduction of a disposition under section 242, is penalised by the designati... |
In my view this assertion is misconceived. Ratio |
Paragraph 2(i) of the relevant rule provides that a postponed debt includes: a creditors right to any alienation which has been reduced or restored to the companys assets under section 242 or to the proceeds of sale of such an alienation. Ratio |
It is clear from the plain words of this provision that the postponed debt is the transferees right to reclaim the property which had been alienated or the proceeds of sale of that property. Ratio |
It addresses the right of a transferee to reclaim the property, which had been alienated and restored to the insolvent estate, if a surplus emerged in a winding up. Ratio |
It does not address the claim in unjustified enrichment of a transferee which has paid an inadequate consideration for the repetition of the sums which it has paid which is inconsistent with any right to a reconveyance of the property to the transferee. Ratio |
The provision therefore does not support a contention that Parliament intended to penalise the gratuitous alienee in relation to a claim for unjustified enrichment. Ratio |
Secondly, they submit that the Scottish Parliament has re-enacted the equivalent of section 242 in personal insolvency (section 34(4) of the Bankruptcy (Scotland) Act 1985), which was the subject of the decisions in Shorts Trustee and Cays Trustee, in section 98(5) of the Bankruptcy (Scotland) Act 2016 (the 2016 Act). ... |
Section 98(5) provides: On a challenge being brought under subsection (2), the court must grant decree - (a) of reduction, or (b) for such restoration of property to the debtors estate, or such other redress, as may be appropriate. ARG |
The 2016 Act is a consolidation Act which follows on the Scottish Law Commissions Report on the Consolidation of Bankruptcy Legislation in Scotland (2013) (Scot Law Com No 232). ARG |
It is intended to restate the law but not change it. ARG |
Counsel for the liquidators submit that by re-enacting section 34(4) in these terms the Scottish Parliament should be presumed to have endorsed the Inner Houses approach in Shorts Trustee and Cays Trustee. ARG |
They refer in this regard to the Barras principle: Barras v Aberdeen Steam Trawling and Fishing Co Ltd 1933 SC (HL) 21; [1933] AC 402 and R (N) v Lewisham London Borough Council [2015] AC 1259. ARG |
The Barras principle is only a presumption and it is not without controversy. Ratio |
Lord Wilberforce and Lord Simon of Glaisdale doubted the validity of the principle in Farrell v Alexander [1977] AC 59, 74F-G and 90E-91C, Lord Neuberger of Abbotsbury has expressed strong reservations as to its propriety and its operation in R (N) (paras 143-148), and Lord Lloyd-Jones has expressed similar reservation... |
In any event, the principle cannot apply in this case as the 2016 Act is a consolidation Act: Haigh v Charles W Ireland Ltd 1974 SC (HL) 1, 40; [1974] 1 WLR 43, 57, per Lord Diplock; MacMillan v T Leith Developments Ltd [2017] CSIH 23, para 109 per Lord Drummond Young. Ratio |
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