STEWART MACDONALD AND PAMELA COYNE, LIQUIDATORS OF GRAMPIAN MACLENNAN'S DISTRIBUTION SERVICES LIMITED AGAINST CARNBROE ESTATES LIMITED
OUTER HOUSE, COURT OF SESSION
[2017] CSOH 8
CA225/14
OPINION OF LORD WOOLMAN
In the cause
STEWART MACDONALD AND PAMELA COYNE, liquidators of GRAMPIAN MACLENNAN’S DISTRIBUTION SERVICES LIMITED
Pursuers
against
CARNBROE ESTATES LIMITED
Defender
Pursuers: Ower; Harper Macleod LLP
Defender: Sanders; DAC Beachcroft (Scotland) LLP
18 January 2017
Introduction
[1] Grampian MacLennan’s Distribution Services Limited (‘Grampian’) formerly ran a distribution service throughout Scotland and beyond. It had several depots. The centre of its operations was an industrial unit on the Kelvin Industrial Estate in East Kilbride (‘the property’). That was its principal asset. Grampian developed financial problems. By 2014 it owed sums totalling over £1 million to its principal creditors: HM Revenue and Customs (‘HMRC’) and the National Westminster Bank plc (‘NatWest’).
[2] HMRC petitioned to wind up Grampian in respect of £550,000 of unpaid taxes. The Sheriff at Edinburgh appointed Mr Macdonald as provisional liquidator on 12 September 2014. Subsequently the company’s creditors appointed both pursuers as the joint liquidators of the company.
[3] In July 2014 Grampian sold the property to Carnbroe Estates Limited (‘Carnbroe’). The disposition narrated that the purchase price was £550,000. On the settlement date, however, Grampian did not receive any payment. Instead Carnbroe paid £473,604.88 to Natwest. That was the amount of Grampian’s outstanding debt under its loan facility. In return Natwest discharged the standard security it held over the property. It was not until June 2016 that Carnbroe paid the balance of the purchase price to the liquidators.
[4] The liquidators now challenge the transaction as a gratuitous alienation. They maintain that the market value of the property was roughly double the purchase price. Carnbroe submits that it did give adequate consideration because the transaction was a ‘distress sale’.
Legal Framework
[5] Section 242 (4) of the Insolvency Act 1986 provides that where a court holds that a transaction is a gratuitous alienation, it:
“… 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—
(a) that immediately, or at any other time, after the alienation the company’s assets were greater than its liabilities, or
(b) that the alienation was made for adequate consideration,
…
without prejudice to any right or interest acquired in good faith and for value from or through the transferee in the alienation.”
[6] What constitutes adequate consideration? That question has been considered in a number of authorities: Macfadyen’s Trustee v MacFadyen 1994 SC 416; Lafferty Construction Ltd v McCombe 1994 SLT 858; Jackson v The Royal Bank of Scotland plc 2002 SLT 1123; and Joint Administrators of Questway Limited & Ors v Stonegale Limited 2015 SCLR 619. The test is an objective one. The defender need not establish that the consideration was the best that could have been obtained. It must, however, be not less than would reasonably be expected in the circumstances if the parties were acting in good faith and at arm’s length. Put short, the court enquires whether the transaction was a commercial one. If the answer is yes, then the consideration is presumed to be adequate.
The Facts
[7] Grampian was established in 1984. Its customers included major concerns such as Cadbury and Tesco. For many years Derek Hunter and his wife Hazel Hunter owned and operated the business. Grampian purchased the property in October 2005 for £630,000. It comprised a warehouse depot, a vehicle workshop, and a yard with a gatehouse. The buildings dated from the 1970s. By 2014 the depot was ‘somewhat tired’ in appearance. All the buildings required further maintenance, repair and upgrading. The property sits on a plot with an area of 4.4 acres. The yard itself was sufficiently large to be capable of part of it being sold off separately.
[8] In return for loan facilities, Grampian granted not only a standard security, but also a bond and floating charge in favour of NatWest.
[9] In May 2014 Mr Hunter had concerns about Grampian’s financial position. He consulted an independent insolvency practitioner about a members’ voluntary liquidation. Mr Hunter believed at that stage that the sale of the property would yield sufficient funds to allow a distribution to be made to Grampian’s shareholders.
[10] Mr Hunter had reasonable grounds for his belief. The previous year DM Hall had valued the property at £1.2 million on an open market basis. In 2009, it had valued the property at £1.3 million. On each occasion DM Hall reduced its valuation to £800,000 on the assumption that there was a limited marketing period of 180 days.
[11] Kevan Quinn purchased Grampian in July 2014. In his witness statement, he narrated the circumstances in which he said that occurred:
he discussed the company’s problems in detail with Mr Hunter
Mr Quinn took it over in the hope that he could turn it around and make a profit
he became its sole shareholder and director.
shortly after the take over, it became clear to him that Grampian could not meet its obligation to pay NatWest c £4,600 per month
NatWest was not prepared to continue to support the company
no alternative funding was available, or at least not in the short term
[12] Mr Quinn discussed the position with Christopher Gaffney, who was the sole shareholder and director of Carnbroe. It is a haulage, plant hire and property company. The two men had had business dealings with one another for over 30 years. They had both been directors of the same company. Grampian and Carnbroe had the same registered office in Glasgow.
[13] Prior to Mr Quinn’s acquisition of Grampian, Carnbroe had expressed an interest in the property. On 17 April 2016 its solicitors, Peterkins Robertson Paul (‘PRP’), wrote to Grampian indicating that Carnbroe might be willing to purchase the property for £900,000. It was not a formal offer and Grampian did not respond.
[14] On learning of Grampian’s worsening financial predicament, Mr Gaffney thought that he might be able to secure a deal on advantageous terms. According to his witness statement, he was aware that rewiring and asbestos removal was required.
[15] Carnbroe approached the Bank of Scotland plc for a loan to facilitate the purchase of the property. Following standard practice, the bank instructed a valuation from DM Hall for security purposes. In a report dated 23 June 2014 DM Hall confirmed its 2013 valuation. It stated that the subjects had a market value with vacant possession of £1.2 million, which dipped to £800,000 on the assumption of a restricted 180 day marketing period.
[16] The Bank of Scotland was concerned about the seemingly low purchase price. On 28 July its solicitors wrote to PRP querying the position:
“The differential is significant and without a good explanation I suspect that the Bank will be very concerned that their Standard Security could be adversely affected in the event that a liquidator of Grampian sought to strike down the sale because of the discrepancy between the sale price and what the market value appears to be.”
[17] Mr Kilpatrick of PRP consulted Ian Woods of DM Hall before responding as follows on the same day:
“On the acquisition of the shares in the company it was accepted that NatWest would be calling for payment of the sums due to them: (approx £550k). NatWest are now calling for payment under threat of enforcement of their securities: so, in my opinion, and in the opinion of Ian there is: –
no willing seller;
no willing buyer and we do not have the six-month window in which to dispose of the property.
Indeed, Ian reckons that even with a 90 day window the property valuation could be reduced by 50%. In this case, the window was even less than 90 days and so I have put through the transaction at £550,000.”
[18] With that reassurance, the Bank of Scotland advanced £600,000 to Carnbroe on 15 August 2014. The settlement date was three days later. On receipt of the sum of £473,604.68 from Carnbroe, Natwest discharged its standard security. The following day, the Bank of Scotland registered a fresh standard security over the property granted by Carnbroe.
[19] There appears to have been a general concern by those involved about the level of the purchase price. On 5 September DM Hall provided further comments to PRP. It stated that the circumstances of the sale were very different from those assumed in its June valuation. In particular the transaction had been effected under distress. Grampian was not a willing seller and Carnbroe’s hand was effectively forced. The sale was completed within a very short period. DM Hall concluded that “there can be a fundamental difference between ‘price’ and ‘value’ and this would appear to have been borne out by the transaction recently completed.”
[20] As Grampian did not receive the proceeds of the sale, its cash position did not improve. It was therefore unable to meet its tax bill and HMRC lodged the winding up petition.
[21] On taking office the liquidators reviewed the adequacy of the consideration. They decided to challenge it and raised these proceedings. Mr Gaffney attended the pre-proof meeting held on 17 May 2016. The minute records that “the defender indicated that the balance of the purchase price would be paid.” Mr Sanders gave an undertaking to the court on the first day of the proof that the sum would be paid within five working days.
Expert Evidence
[22] I heard the evidence of two experienced surveyors at the proof: Iain Prentice of Colliers International and Alistair Buchanan of Shepherds. I found both of them to be careful and measured witnesses. Each adopted a comparative approach. They looked at the sale prices of similar subjects at the relevant time and exercised their judgement to arrive at their figures.
[23] Mr Prentice valued the subjects at £820,000. Mr Buchanan valued the subjects at £740,000. Both were market values. In other words, the valuations assumed a bargain between a willing seller and buyer at arm’s length with a proper marketing period and no element of compulsion.
[24] The two surveyors met and exchanged views in advance of the proof. They agreed that:
a. Both their approaches were fair and reasonable. The difference between their respective figures related to the yard. Mr Prentice estimated that the value of the subjects was £690,000 but believed that a surplus bit of the yard could be sold off for £131,000.
b. The difference between their two figures was less than 10%, which is an acceptable tolerance within the surveying profession.
c. A discount of 25% to 30% would be acceptable if marketing was restricted to six months. A further discount could well be anticipated under “more stringent marketing conditions”.
[25] The two surveyors differed to some extent on whether there was a ready market for the property in the middle of 2014. Mr Prentice said that a company called Bullet Express had contacted one of his colleagues at Colliers and expressed an interest in the property. Bullet Express had asked to be kept informed if anything similar came on the market. Mr Prentice had no other details. He suggested that if it had been the right time for Bullet Express, Grampian could have sold the subjects in six months. Otherwise he would have expected marketing to take about 12-24 months to achieve a sale.
[26] Mr Buchanan said that the expressions of interest by Bullet Express and Carnbroe did not influence his valuation, because he was not aware of the circumstances in which they were made.
[27] Neither surveyor said that he would ‘have raised an eyebrow’ at a price of £550,000 in the circumstances and having regard to marketing costs and an estate agency fee.
Submissions
[28] Miss Ower submitted that the consideration was less than could reasonably be expected in the circumstances, had the parties been acting at arms’ length in good faith. She relied on (i) the 2006 purchase price, (ii) the DM Hall valuations, (iii) the expressions of interest by Carnbroe and Bullet Express, (iv) the fact that it was an off-market transaction, (v) the links between Mr Quinn and Mr Gaffney, and (vi) Carnbroe’s failure to pay the full price at the time.
[29] Mr Sanders contended that Carnbroe paid an adequate consideration in the ‘real world’ circumstances that prevailed. Grampian was fighting for its survival and Mr Quinn had to make a quick decision. He knew that Carnbroe could provide financial help if it obtained an advantageous deal.
Decision
[30] I conclude that Carnbroe has established that £550,000 did constitute adequate consideration for the property. While the purchase price fell short of the open market value, Grampian had very limited options. It was in a perilous financial position. It could not afford the leisure of a lengthy marketing period. Natwest was threatening to call up the standard security and to use other diligence against it in terms of the bond and floating charge it held. There was no other offer on the table. The earlier expressions of interest were just that. There was no solid proposal to accept.
[31] Carnbroe’s offer presented an opportunity to obtain a quick sale. To place the property on the open market would have involved significant expense. There would have been advertising costs and an estate agency fee of 1% to 1.5%. There was no clear indication that a sale would be achieved within the standard marketing period of 12 to 24 months. According to the surveyors’ evidence, a stigma can attach to a property that remains on the market too long. It might be the subject of vandalism.
[32] Mr Quinn and Mr Gaffney were not ‘associates’ in terms of the legislation. Nevertheless their long business relationship justifies very close scrutiny of the transaction. Both independent surveyors said that a price of about £555,000 was not unusual or inappropriate if the property had been marketed on a closed basis for a period of six months. Mr Prentice said that if the open market valuation was taken to be £740,000, then in respect of the agreed purchase price “ordinarily I don’t think it would raise an eyebrow.”
[33] In those circumstances I conclude that a price of £550,000 was adequate consideration.
[34] For the avoidance of doubt, I also hold that £473,604.68 was inadequate consideration for the property. Accordingly the liquidators were justified in raising the present action. I shall put the case out by order to discuss final orders.