JUDGMENT
Brown and another, the Joint Administrators of
Loanwell Limited (Respondents) v Stonegale
Limited (Appellant) (Scotland)
Brown and another, the Joint Administrators of
Oceancrown Limited (Respondents) v Stonegale
Limited (Appellant) (Scotland)
Brown and another, the Joint Administrators of
Questway Limited (Respondents) v Pelosi
(Appellant) (Scotland)
before
Lord Neuberger, President
Lord Sumption
Lord Reed
Lord Carnwath
Lord Hodge
JUDGMENT GIVEN ON
22 June 2016
Heard on 15 February 2016
Appellant Respondents
Alan Summers QC Kenneth McBrearty QC
David Massaro Susan Ower
(Instructed by Halliday
Campbell WS
)
(Instructed by Pinsent
Masons LLP
)
Page 2
LORD REED: (with whom Lord Neuberger, Lord Sumption, Lord Carnwath
and Lord Hodge agree)
1. These three conjoined appeals concern section 242 of the Insolvency Act
1986, as amended. Where section 242(1) applies, and a company enters
administration, an alienation by the company is challengeable by the administrator.
In terms of section 242(2), section 242(1) applies where by the alienation, any part
of the company’s property is transferred or any claim or right of the company is
discharged or renounced, and the alienation takes place on a relevant day as defined
by section 242(3) (that is to say, within a specified time before the date when the
company enters into administration). In terms of section 242(4), on a challenge
being brought under subsection (1), the court shall grant decree of reduction or for
such restoration of property to the company’s assets or other redress as may be
appropriate, but the court shall not grant such a decree if the person seeking to
uphold the alienation establishes that it was made for adequate consideration.
2. These proceedings were brought under section 242(1) by the joint
administrators of Oceancrown Ltd, Loanwell Ltd and Questway Ltd, in respect of
alienations made by each of those companies of four properties in Glasgow during
November 2010, nine months before the companies went into administration. The
alienations took place on relevant days as defined. The administrators are the
respondents to the present appeals.
The facts
3. The facts, as found by the Lord Ordinary, are as follows. Oceancrown and
the other companies in administration were part of a group of companies controlled
by Ralph Norman Pelosi (“Mr Pelosi senior”). He was the beneficial owner of their
shares, the sole director of Oceancrown and Loanwell, and a shadow director of
Questway. He was also the 99% owner (subsequently 100%) of another company,
Strathcroft Ltd. The nominal director of that company was John Anderson. Norman
Ralph Pelosi (“Mr Pelosi junior”) was the sole shareholder and director of a further
company, Stonegale Ltd. He is the appellant in one of the appeals, and Stonegale is
the appellant in the others.
4. A secured facility in the region of £17.3m had been made available to
Oceancrown by Anglo-Irish Bank. The other companies in the group had crossguaranteed the debt. Oceancrown owned a commercial property at 278 Glasgow
Road, Rutherglen. It also owned properties at 110 and 260 Glasgow Road. Loanwell
Page 3
owned a property at 210 Glasgow Road. Questway owned a property at 64 Roslea
Drive, Glasgow. The bank held standard securities over each of these five properties.
5. Mr Pelosi senior had concluded an agreement with Clyde Gateway
Development Ltd for the sale of 278 Glasgow Road for £2,467,500 inclusive of
VAT: a sum far in excess of an earlier valuation of the property at the sum of
£762,000. Subsequent events were, in the Lord Ordinary’s words, “machinations
designed to protect the ‘profit’ on the sale of number 278” (para 44), by keeping it
out of the hands of the bank.
6. On 19 August 2010 Robert Frame, a solicitor of Miller Becket and Jackson
(“MBJ”), a Glasgow firm of solicitors, wrote to the bank’s solicitor, Mr Gillespie of
McClure Naismith, in relation to the release of the properties from the bank’s
securities, giving “details of the properties and the relevant sale price”. According
to the details stated, the sale price of 278 Glasgow Road was £762,000; the sale price
of 110 Glasgow Road was £200,000; the sale price of 210 Glasgow Road was
£934,000; and the sale price of 260 Glasgow Road was £450,000. Mr Gillespie was
subsequently informed that 64 Roslea Drive was also to be sold, at a price of
£68,000. The total sale price of the five properties, as stated, was £2,414,000. Mr
Gillespie passed this information on to the bank, and prepared discharges of the
standard securities. These were duly executed by the bank, and Mr Gillespie was
authorised to deliver them to MBJ in exchange for the free proceeds of sale. In
reality, as explained earlier, the actual sale price of 278 Glasgow Road was
£2,467,500, and no sales had been agreed in respect of the other properties.
7. On 10 November 2010 Oceancrown disponed 278 Glasgow Road to
Strathcroft. The consideration was recorded in the deed as being £762,000. On the
same day, Strathcroft disponed the same property to Clyde Gateway for £2,467,500.
Mr Frame witnessed the execution of both dispositions. The Lord Ordinary found
that “Strathcroft was involved in the whole matter only in order to provide a shortlived intermediary between Oceancrown and Clyde Gateway. … It was a cog in Mr
Pelosi’s machine” (para 47).
8. On 16 November 2010 Mr Frame received a letter signed by Mr Anderson
on behalf of Strathcroft, authorising MBJ to send the bank the sum of £2,414,000
“in respect of purchases of [the five properties]”. Mr Frame transmitted the money
as instructed. Once the bank received the funds, the executed discharges were
delivered. The Lord Ordinary found that “the money was paid to MBJ then to the
bank on the instructions of Mr Pelosi senior. Strathcroft had no real involvement in
that” (para 47). He also found that “the bank was misled in relation to the funds it
received” (para 39). “The bank, acting on the information from MBJ, treated the
funds as the sale price of all the subjects, but that was not an accurate understanding”
(para 41). “Everyone, apart from the bank and the bank’s solicitor, knew that the
Page 4
funds were the sale price of only 278 Glasgow Road. … Had the bank known the
true facts, namely that 278 was sold for almost £2.5m, the same overall reduction in
bank indebtedness would have occurred, but only the standard security over 278
would have been discharged” (paras 39-40). “Everything depended upon the bank
and the bank’s solicitor being unaware of the truth. No doubt they assumed that they
could trust the information provided by MBJ” (para 42).
9. As a consequence of the fact that “the bank was misled into using part of the
sale price of 278 Glasgow Road to discharge all the standard securities” (para 40),
the four remaining properties, with an agreed value of £1.525m, were now free of
the bank’s standard securities. It only remained to place them entirely beyond the
bank’s reach.
10. On 24 November 2010, 110, 210 and 260 Glasgow Road were disponed to
Stonegale, and 64 Roslea Drive was disponed to Mr Pelosi junior. It is those
dispositions which are challenged in the present proceedings. The dispositions,
witnessed by Mr Frame, contained a date of entry of 16 November 2010, and
recorded the consideration given as being in accordance with the figures given to
Mr Gillespie. In reality, nothing was paid. The following year, Mr Pelosi junior
disponed 64 Roslea Drive to a third party for £125,000.
11. In the proceedings before the Lord Ordinary, a document was produced
which purported to be a loan agreement in the sum of £1,584,000, signed by Mr
Pelosi junior and dated 16 November 2010. It narrated that it had been entered into
between Strathcroft and Stonegale to enable the latter to finance the purchase of the
properties at 110, 210 and 260 Glasgow Road. In evidence, Mr Pelosi junior
confirmed that he had signed the loan agreement on 16 November 2010. The Lord
Ordinary found that the document was a sham (para 44), “concocted purely for the
purpose of the defence of these proceedings” (para 46).
The proceedings below
12. Before the Lord Ordinary, it was argued that the four dispositions under
challenge were made by the companies for adequate consideration, namely the
reduction in their contingent liabilities (under their cross-guarantees of
Oceancrown’s obligations) which resulted from the payment made by Strathcroft to
the bank. That reduction in indebtedness, of £2,414,000, was in excess of the open
market values of all five properties, and therefore constituted adequate
consideration. That argument assumes that the open market value of 278 Glasgow
Road was the £762,000 at which it had been valued by a surveyor: an assumption
which is contradicted by the fact that Clyde Gateway paid almost £2.5m for it in an
arm’s length transaction whose bona fides is not disputed. More fundamentally, the
Page 5
argument disregards the fact that the four other properties were all disponed
gratuitously in subsequent transactions.
13. In rejecting the argument, the Lord Ordinary focused on the latter point:
“No one paid anything for 110, 210, 260 Glasgow Road and 64
Roslea Drive. The sellers, namely Oceancrown, Loanwell and
Questway, did not receive anything in return for the
dispositions under challenge. They gifted the properties to the
dispones. … That the bank was prepared to discharge the
standard securities over all five properties in return for the
monies forwarded to it does not create a consideration given in
return for the subsequent dispositions to Stonegale. No party
gave the sellers anything in return for the conveyances under
challenge. Any value received was the value paid in respect of
number 278. That is what was transferred to McClure
Naismith. In my view nothing else alters that basic fact. All that
happened was that Strathcroft, on the direction of Mr Pelosi
senior, paid the bank monies which were designed to, and did
persuade the bank to discharge the standard securities over the
five properties, all in order to facilitate the subsequent
gratuitous sales. Neither that payment, nor any consequential
reduction in indebtedness, was in consideration for the
subsequent transactions. It was a mechanism for allowing the
inter-company transfers which it was hoped would achieve the
retention of the ‘profit’ on 278 within the group (and regarding
Roslea Drive, Mr Pelosi junior) – and free of the bank’s
securities.” (paras 40 and 42)
The Lord Ordinary added:
“The dispositions under challenge were gratuitous alienations.
Were it otherwise the bank would have received in excess of
£4m, and the overall indebtedness would have been reduced by
that amount. The price obtained for 278 was used to allow the
other Glasgow Road properties to be transferred without
consideration to another company which, nominally at least,
was owned and controlled by Mr Pelosi junior, and, in the case
of 64 Roslea Drive, to him personally.” (para 43)
14. Accordingly, the Lord Ordinary decided that he should reduce (ie set aside)
the three dispositions to Stonegale, order the defenders to execute dispositions of
Page 6
those subjects to the administrators, and order Mr Pelosi junior to repay the £125,000
which he had received for the sale of the fourth property. Before granting decree, he
decided to have the proceedings put out By Order for appropriate disposal.
15. That decision was upheld by an Extra Division of the Inner House (Lord
Menzies, Lord Brodie and Lord McGhie). No issue was taken with the facts found
by the Lord Ordinary. The same argument was repeated, and again rejected, for the
same reasons.
The present appeal
16. In the absence, at the relevant time, of any requirement to obtain permission
to appeal to this court, the appellants took the opportunity to challenge the approach
adopted by the courts below. They submitted that the administrators could have
pursued a number of alternative remedies. They could have challenged the alienation
of 278 Glasgow Road by Oceancrown to Strathcroft. They could have proceeded
against Mr Pelosi senior as director of Oceancrown for breach of his fiduciary duty,
and recovered the proceeds of his breach from the ultimate beneficiaries. If the bank
was the victim of a fraudulent misrepresentation, it could have recovered damages
in respect of its loss. The wrong remedy, it was argued, had been selected. The
failure to challenge the transfer by Oceancrown to Strathcroft meant that the transfer
by Strathcroft to Clyde Gateway could not be impeached. In any event, the £762,000
paid by Strathcroft reflected a professional valuation of the property, and therefore
constituted the property’s market value.
17. There are no doubt a variety of remedies which the administrators might have
pursued, but the issue for this court is whether they are entitled to the remedy which
they have sought. That remedy does not involve a challenge to the disposal of 278
Glasgow Road (or depend on whether the disposal of that property by Oceancrown
was at an undervalue, although it plainly was), but a challenge to the other four
dispositions as gratuitous alienations. The gratuitous nature of the alienations was
clearly explained by the Lord Ordinary in the passages cited at para 13 above. Before
the various conveyances, the companies owned five properties. A bargain was in
place for the sale of one of those properties, 278 Glasgow Road, for the sum of
£2.4m. After the sale was completed, £2.4m was transferred to the bank in reduction
of borrowings, and the companies retained the other four properties, valued at
£1.525m. Those properties were then conveyed to the appellants. The companies
received nothing whatsoever in return. There was no reciprocity between those
disposals and the earlier payment made to the bank. The purpose and effect of those
transactions was to divert assets away from the companies’ creditors: exactly what
section 242 is intended to prevent. That they were gratuitous alienations is plain and
obvious.
Page 7
18. The appeal is therefore dismissed.
