Gratuitous Alienations and the Office Holder

At last!

Truth be told, I have been waiting for this day to come (and worrying about the inevitable implications), but we now know that a liquidator (or administrator or trustee) can be lucratus. With Lord Hodge’s Opinion in Joint Liquidators of Grampian Maclennan's Distribution Services Ltd -v- Carnbroe Estates Ltd (sub nom MacDonald -v- Carnbroe Estates Ltd) the line of decisions which ignored unjust enrichment when addressing a claim by an office holder to reduce a gratuitous alienation has come to an end. The only remaining question is how far will this be taken and will it open the flood gates?

Scots law has never had a separate equitable jurisdiction, unlike that of English law. The Courts in Scotland have always had the ability to consider the “equity” of a relief that was being sought (or which they might grant) in reaching a decision. In the application of section 242 of the Insolvency Act, 1986 the words “or other redress as may be appropriate” (and in section 98 of the Bankruptcy (Scotland) Act, 2016, the words “or such other redress, as may be appropriate”) have now been given their ordinary meaning, rather than the artificially constrained meaning that has previously been applied to them.

In essence, whilst “gratuitous” in Scots law means “for less than fair value” (as opposed to “no value” – the English law phrase “transaction at under value” is far clearer), the Court has to take into account what consideration was given. The Court is not obliged to set off the inadequate price paid against the value received, but it is now entitled to do so.

Whilst some have stated that this decision is to be seen in light of what is the definition of “adequate consideration”, I think that this misses the point. The “adequate consideration” analysis has not changed, what Lord Hodge has said is that, after determining that there was not “adequate consideration”, the Court can look behind that bear fact at what consideration there was, rather than immediately be required to grant reduction of the alienation.

Previously, there was a “triple whammy” for any third party who could not show that “adequate consideration” had been given: firstly, they lost the asset transferred to them; secondly, they did not receive back the inadequate price that they had paid; thirdly, if the Court granted decree against them, their claim for the (inadequate) price paid ranked as postponed claim in the estate, payable only after all the costs and expenses, after all the other creditors had been paid in full and after the creditors had received their entitlement to interest.

I do wonder if this “equitable” approach will now have more far-reaching consequences. For example, would the decision in Burnett’s Trustee -v- Grainger have been decided in the same way, if the principle of unjust enrichment had been applied to the trustee in that case. What if it had applied to the receiver in Sharp -v- Thomson, for that matter. Could this, possibly, have obviated the need for a Report by the Scottish Law Commission and some legal “acrobatics” to deliver the “equitable” result in that case. Food for thought.

What insolvency office holders will now have to bear in mind is that the threat of litigation bring down the triple whammy that I refer to above upon the head of the recipient of a gratuitous alienation is not a weapon readily available to them. This may mean that discussions over and negotiations around settling a claim as to the value paid for an asset revolve around purely commercial grounds. Obviously, if the alienation was entirely gratuitous (with no consideration) the position has not changed.

The good news for insolvency practitioners, however, is that the Supreme Court agreed with the analysis by the Inner House of the circumstances surrounding the transaction itself: if the soon-to-be insolvent party has sold all the assets relating to its trade, the recipient cannot argue a commercial need to raise funds at very short notice to continue the business. Lord Hodge did seem to suggest (para 41 on page 17) that if that position had been argued by the Liquidators in this case at first instance, in the Outer House, the decision there could have been different.

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