You may recall my update in September, 2018 when I addressed a recent decision at that time in a case of mine (Fox -v- Brennan) on gratuitous alienations (the Scottish “equivalent” of transactions at undervalue). The phrase quoted in the subject line was from the decision of Lord Doherty in that case. Somewhat bizarrely, the Defender chose to appeal that decision. I say “bizarre” because, for the first time in over 30 years advising in this area of the law, I was successful in objecting to a grant of Legal Aid to a party (including in my submission, the quotation of the phrase I refer to). If the Scottish Legal Aid Board were not prepared to fund the appeal, the prospects of success must have been as close to “nil” as it is possible to get! In any event, the appeal proceeded (at the end of October, 2019).
Since then, the Supreme Court has issued its decision in the Carnbroe Estates case which, potentially, could radically alter the approach of the Courts to the remedies available in any successful challenge to a gratuitous alienation. It is nice to know, however, that the approach to deciding upon whether an alienation is gratuitous, and what does and does not form “adequate” consideration is unchanged.
In the Inner House decision (now known as Quinn -v- Brennan), which was issued on 22nd January, 2020, Lord Drummond-Young (who delivered the Opinion of the Court) quotes (with obvious approval) the redolent phrase in the subject line. What the Defender sought to argue was that paying the Debtor the amount of the gratuitous alienation after the Debtor had been sequestrated (and, in this case, discharged) satisfied the requirement for adequate consideration. As I say, Lord Doherty considered that a “startling proposition”. Lord Drummond-Young was no less scathing in his analysis of the position.
Firstly, the decision addresses the suggestion that any payment, made at any time after the alienation, can be attributed to consideration. This is rejected. The element of consideration has to be agreed at the time and be reciprocal:
“the existence of consideration requires that there should be an exchange – “something given … in return for something else”. That requires the agreement of both parties to the transaction. If they do not agree on the necessary element of exchange or reciprocity at that time, there is no consideration. For that reason, a subsequent payment cannot be converted into consideration; the most elementary feature of that concept is absent.”
In underlining the implications of this passage, Lord Drummond-Young goes on to say:
“The critical point is that agreement is needed to create consideration, and the existence or otherwise of consideration must be determined at the time of that agreement.”
This is an interesting analysis, given the subsequent decision from the Supreme Court that I have referred to. I wonder if the latter’s more purposive and “free-wheeling” approach to the remedies available fits with the analysis that if consideration is not agreed at the time of the alienation, there is no consideration.
Secondly, and very simply, Lord Drummond-Young states:
“Our second reason for rejecting the arguments for the defender is perhaps of an even more fundamental nature than the first reason. In our opinion the 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 response to the Defender’s claim that the payment by her to the Debtor put the Debtor back in the same position as before the alienation, Lord Drummond-Young was damning:
“In our opinion this argument is erroneous. The fundamental point … is that the repayment was made to the estate of the debtor following his discharge, at a point where the repayment did not benefit the creditors of his estate as at the date of formal insolvency.”
In short, the law on gratuitous alienations, whilst somewhat uncertain in respect of the remedy that the courts may grant, is in rude health when dealing with what the courts will consider to be adequate consideration.