IP Briefing: New Decade, Same Old Issues – when is consideration adequate

Background

The Inner House have recently considered an appeal by the defender in the case Quinn v. Brennan (previously Fox v. Brennan). In 2018 Lord Doherty determined that a payment made by the debtor (Ms Brennan’s partner) in 2014, some 6 months prior to his sequestration, which she then used to purchase a house in her name and sold after his discharge in 2017 (at the debtor’s request) giving him back the cash, had been a gratuitous alienation. No surprises there. The defender had argued that the 2017 repayment was adequate consideration and had restored the property to the debtor’s estate.  Lord Doherty disagreed. The phrase “startling proposition” was used! The defender appealed suggesting that Lord Doherty had erred in arriving at the view that “consideration” meant that something more or less equivalent in value had to be exchanged at the time of the alienation.      

Decision

The Inner House judgement clearly states that the appeal turned on the meaning of the word “consideration” as used in the insolvency legislation generally.  Their Lordships found that the 2017 payment made by the defender to the debtor was not consideration. The reasoning was twofold.  Firstly, a payment made over two years after the alienation challenged, with no prior obligation to make the payment, could not properly be regarded as the counterpart of the alienation which must have “a fundamental element of exchange or reciprocity between the payment and the alienation; the payment must be regarded on objective grounds as a quid pro quo for the alienation”. This, the court said, is the “fundamental meaning of the word “consideration”. Secondly, the court found that payment of funds to a discharged bankrupt is not capable, as a matter of law, of amounting to consideration for an alienation made by the bankrupt prior to his sequestration. In their reasoning for arriving at this conclusion their Lordships discuss the concept of dual patrimonies, which involves the debtor’s sequestrated estate – held in a form of statutory trust by the trustee – being entirely distinct from the debtor’s own property.  

The defender attempted to argue that if her 2017 payment was not adequate consideration it would be an unjust and anomalous result, as she would be required to repay the alienation twice. Their Lordships were not persuaded and determined that this was not a valid defence. 

Analysis

This is the first Inner House judgement to be issued in the wake of  the Supreme Court decision in Carnbroe and gives us a detailed analysis of the importance of timing and mutual benefit when determining what amounts to “adequate consideration”, Crucially for Insolvency Practitioners, this decision reaffirms that  debtors are not able to circumvent the statutory challenge to alienations by simply transferring a large amount of money to their partner prior to sequestration for them to “look after” until the debtor obtains their discharge. If the Inner House had upheld the appeal, the result would have given the green light for debtors to transfer property before their sequestration, with the understanding they could get it back once their sequestration had been discharged which, in the words of Lord Doherty would have been a “startling proposition” indeed.