A Supreme Court decision over the sale of an insolvent company’s warehouse premises in East Kilbride for a knockdown price has been greeted as “good news” for the property market in Scotland.
The court ruled that there can be greater flexibility in remedies for so-called “gratuitous alienations”, giving hope to the property’s purchaser that it might be able to avoid having the transaction annulled.
The case concerns a challenge to the sale by an insolvent Scottish company, Grampian MacLennan’s Distribution Services Ltd, of its principal asset, 9 Stroud Road, Kelvin Industrial Estate, East Kilbride, for less than market value. In March 2013, chartered surveyors had valued the property at £1.2m on the open market, but it was sold to Carnbroe Estates Ltd in July 2014 for only £550,000 in a quick, off-market sale.
Instead of paying the agreed consideration to Grampian, Carnbroe repaid the seller’s NatWest loan directly to obtain a discharge of the standard security over the property. This left Grampian’s other principal creditor, HMRC, unpaid.
HMRC presented a petition for winding up Grampian, liquidators were appointed and they brought proceedings to challenge the sale. At first instance, the Lord Ordinary held that the sale of the property was made for adequate consideration. However, on appeal, the Inner House “reduced”, or annulled, the transaction and ordered Carnbroe to transfer the property to the liquidators.
Now the Supreme Court has unanimously allowed Carnbroe’s appeal, but only to the extent of remitting the case to the First Division of the Inner House to consider what the appropriate remedy is under section 242(4) of the Insolvency Act 1986.
Giving the court’s judgment, Lord Hodge found that the statutory words of the key section are broad enough to allow the courts, in appropriate cases, to devise a remedy to protect the good- faith purchaser, rather than annulling the sale.
Gareth Hale, partner at Dentons, said: “This decision is, in general, good news for the Scottish property market.
“The previous rule in Scotland had been that the purchaser in a transaction later found to be a gratuitous alienation (sale at undervalue) lost both the property and, in all likelihood, the purchase price too. This could result in a windfall for the insolvent estate.
“The Supreme Court has sought to protect good-faith purchasers by striking a fairer balance in the unravelling of gratuitous alienations. The clarification that, in general terms, the remedy granted by the court (under section 242 of the Insolvency Act 1986 ) should have the aim of putting parties into the position which they would have been in without the transaction is new ground for the Scottish courts. It moves Scots law closer to the position in England and Wales.”
However, he warned: “Purchasers should however still exercise caution. While the Supreme Court judgment provides some comfort, they should not be blinded by a bargain. If a price looks too good to be true, it quite possibly is – particularly if the seller is in the process of winding up its business and there is little prospect of it continuing to trade.
“The incentive for insolvency practitioners to challenge a potential gratuitous alienation also decreases in light of this decision as the outcome of such a challenge is much less likely to result in a windfall for the insolvent estate.”
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