05 Dec 2019
The UK Supreme Court has provided clear guidance on how selling property at sub-value might not be as much of a “quick fix” for struggling businesses yesterday’s Judgement in the case of “MacDonald and another –v- Carnbroe Estates Ltd”  UKSC 57.
When a company can no longer pay their debts as they fall due, their creditors are entitled to ask the Court to appoint insolvency practitioners to take over the affairs of the business, settle what debts they can and wind the company up thereafter. In some circumstances, however, a business may have disposed of major assets prior to such a Court Order, often at a reduced price. It is for the insolvency practitioners to recover these assets if they have been sold at below market value- or for inadequate consideration. This is known as “gratuitous alienation.” If the Court find that there has been a gratuitous alienation, they may order the Purchaser to transfer the property back to the insolvency practitioner- becoming an unsecured creditor and therefore unlikely to recover their purchase price.
The UK Supreme Court issued their eagerly awaited Judgment in the case of MacDonald and another –v- Carnbroe Estates Ltd yesterday which defined what “adequate consideration” is in terms of 242(4)(b) of the Insolvency Act 1986 for gratuitous alienations.
In this case, a company (G) had their Property valued by surveyors at £1.2m on the open market with a reduced value of £800,000.00 on a restricted marketing period of 180 days. G thereafter fell into financial difficulties and was sold to (Q). Shortly after this takeover, G’s cash-flow collapsed and they fell into loan arrears. Q decided to sell the Property to Carnbroe Estates for a reduced price of £550,000.00 in an attempt to effect a “quick sale.” Carnbroe, however, paid the purchase price directly to G’s lender (NatWest) in order to prevent repossession action. Accordingly, G did not have the funds to satisfy other creditors and HMRC successfully Petitioned the Court for the winding up of G. The insolvency practitioners sought to recover the Property on the basis that it was sold for inadequate consideration under s.242(4)(b) of the Insolvency Act 1986.
The Outer House of the Court of Session were of the Opinion that it was not inadequate consideration however the Inner House of the Court of Session (Scotland’s highest appeal court) disagreed and the Defenders appealed to the UK Supreme Court.
The Supreme Court held that the meaning of “adequate consideration” is to be determined according to “an objective test, having regard to the commercial justification of the transaction in all the circumstances and assuming that the parties would be acting in good faith and at arm’s length.”
Where the sale of an asset is unlikely to help keep the business afloat, the creditors must be the first and foremost priority. This means that adequacy will depend on whether there is prejudice to said creditors for example if a far higher price could be achieved given the circumstances.
In the event that the Property cannot be fully marketed then the Court will decide adequacy on what the insolvency practitioner would have been able to achieve, given the circumstances.
In the case at hand, the Court held that £550,000.00 was not adequate consideration. The sale of the Property was a part of informal winding up of the Company and the Company was not trading at the time. There was no real prospect that a “quick sale” would allow the business to survive and accordingly, there was no urgency and so no justification for a “quick sale” at a significantly reduced price.
The Court recognised the position that when such an order is made to transfer Property back to the insolvent business there is extreme prejudice for Purchasers who act in good faith. The Supreme Court has held that the Courts are able to provide a remedy to the good faith Purchaser.
The case has been remitted to the Inner House’s for them to decide what remedy may be awarded. Their decision is awaited.
Whether your business is flying or is enduring hard times, it is absolutely crucial that you seek good quality legal advice. Aberdein Considine are leading SME legal specialists with a wide variety of commercial practice areas. Our Dispute Resolution team have a proven track record of assisting SMEs and larger corporations in all aspects of Commercial Dispute Resolution and Commercial Litigation, including assisting businesses with Insolvency, Property Disputes, Contractual and Delictual Claims and Debt Recovery. Our Corporate and Commercial team have extensive experience in high value property transfers and mergers and acquisitions.
For more information, please contact either Euan McSherry, Ross Webb, Carly Stewart or Jennifer Matthew who are able to discuss your business needs with you.