Gratuitous Alienations: What is Adequate Consideration?

Background

Regular readers may recall the case of the Liquidators of Grampian Maclennan’s Distribution Services Limited v Carnbroe Estates Limited. In summary, at first instance, the insolvency Judge held that the Defenders had demonstrated they had paid “adequate consideration” in terms of section 242 (4)(b) of the Insolvency Act 1986 in respect of their purchase of Grampian’s main trading premises, shortly before liquidation. 

Surveyor evidence had been accepted by the court to the effect that while the value of the premises may have been up and around £800,000 on an open market value basis, under forced sale conditions the value was lower – potentially around £550,000, the sum which had been paid for the premises. 

Decision of the Inner House

The decision in the Joint Liquidator’s appeal was issued on 23rd January 2018. It was delivered by Lord Drummond Young who may be our leading insolvency jurist. Delivering the opinion of the court, Lord Drummond Young gives a survey of the law of adequate consideration. In very brief terms the court reaches the conclusion that it is wrong to assess adequacy just in terms of forced sale value of property in a case like this. Indeed, the court decided that in actual fact, where it should be clear that a company would ultimately cease trading, or indeed had ceased trading, a forced sale value was really of no relevance at all. The purpose of section 242 was to ensure that the creditor’s interests were put first, above the interests of directors, members and their family and friends. While in this case the director of the Defenders was not an associate in terms of the act his relationship with the director of Grampian bore close scrutiny. Lord Drummond Young opined:

“… We are of opinion that the courts should take a relatively strict view of the adequacy of consideration. Adequacy must be assessed objectively… The need for a strict and objective approach is particularly important if the debtor’s business has ended or is about to come to an end.”

 In conclusion Lord Drummond Young said:

“It is perhaps worth emphasising that, especially in technical areas such as insolvency law, detailed analysis of the relevant legal provisions and their underlying policies are of the greatest importance, even in cases where most of the time in court is taken up with the leading of evidence.”

 In this case it ought to have been clear when the property transfer happened that the company would cease trading. There was no real benefit to general creditors. The Joint Liquidator’s appeal was allowed given that the subsequent Liquidator could have proceeded to sell the property without forced sale conditions.

Comment

This is a particularly interesting result. It remains to be seen if the Defenders will appeal to the Supreme Court. There has been a tendency amongst the bar and practitioners to look at forced sale values when assessing the merits of any defence being offered against Liquidator’s claims in cases like this. The court is giving a clear indication that it will not be enough simply for a Defender to say that a forced sale value was paid. They will need to demonstrate that the transaction was in the interests of the general creditors if a payment less than the open market value is made. This case will be of considerable interest to practitioners in assessing strength of claims.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk).This briefing note is current as at 23rd January 2018 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).