Supreme court to hear claims suspension of parliament is unlawful ...




In March 2013, chartered surveyors valued the Property at £1.2m on the open market and at £800,000 on a restricted marketing period of 180 days. The following year, Grampian fell into financial difficulty and was sold to Mr Quinn. At this time, Grampian owed more than £500,000 to each of National Westminster Bank plc (“NatWest”), which held a standard security over the Property, and HM Revenue and Customs (“HMRC”). Shortly after Mr Quinn’s takeover, Grampian’s cash flow collapsed and its monthly loan repayments to NatWest fell into arrears. Mr Quinn sold off Grampian’s trucks and entered into discussions to sell the Property with a businessman he had known for over 30 years, Mr Gaffney. Mr Gaffney negotiated on behalf of his family company, Carnbroe Estates Ltd (“Carnbroe”), to acquire the Property at a reduced price, citing the risk of repossession by NatWest and the fact that the buildings needed repairs and refurbishment. Mr Quinn and Mr Gaffney eventually agreed that Carnbroe would buy the Property for £550,000 in a quick, off-market sale. Grampian transferred the Property to Carnbroe on 24 July 2014. However, instead of paying the agreed consideration to Grampian, Carnbroe repaid the NatWest loan directly to obtain a discharge of the standard security. 

Carnbroe then obtained a loan from the Bank of Scotland plc, which was secured against the Property. The sale of the Property and repayment of NatWest’s loan left Grampian’s other principal creditor, HMRC, unpaid. HMRC wrote to Grampian requiring payment of tax that was due. On Grampian’s failure to pay, HMRC presented a petition for winding up Grampian. The Respondents (Mr MacDonald and Ms Coyne) were appointed as joint liquidators of Grampian and commenced 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 (the Lord President, Lord Drummond Young and Lord Malcolm) reduced (annulled) the transaction and ordered Carnbroe to transfer the property to the Respondents. Carnbroe appealed to the Supreme Court.


The appeal concerned a challenge to the sale by an insolvent Scottish company, Grampian MacLennan’s Distribution Services Ltd (“Grampian”), of its principal asset and place of business (the “Property”) at a value lower than could have been achieved on the open market. The parties were disputing the proper interpretation of “adequate consideration” in section 242(4)(b) of the Insolvency Act 1986 (the “1986 Act”) and whether the court has any discretion as to the remedy it may give under that section. The issue pertaining to undervaluing of assets was also looked into.


The Supreme Court unanimously allowed the appeal only to the extent of remitting the case to the First Division of the Inner House to consider what is the appropriate remedy under section 242(4) of the 1986 Act.


The Supreme Court held  that the meaning of “adequate consideration” is to be determined according to an objective test, having regard to the commercial justification of the transaction in all the circumstances and assuming that the parties would be acting in good faith and at arm’s length.

“32. Both judges correctly emphasise the objective nature of the test and that regard must be had to the commercial justification of the transaction in all the circumstances on the assumption that hypothetical people in the position of the insolvent and the transferee would be acting in good faith and at arm’s length. In my view, the requirement that the hypothetical parties are acting at arm’s length means that the hypothetical purchaser would not have knowledge of the seller’s financial distress unless the insolvent’s financial embarrassment was known in the relevant market. It would not be a relevant consideration that the actual vendor had disclosed its financial embarrassment to the purchaser and that the purchaser had exploited that disclosure in its negotiation of the purchase price. There is nothing to suggest that the 1985 statutory reforms sought to innovate in this regard. As a result, the statutory provisions apply during the specified period before formal insolvency (in this case liquidation) whether or not the insolvent is aware of his, her or its insolvency and whether or not the transferee or purchaser is so aware.”

As regards the circumstances that would be relevant to this assessment, the Court considers that, unless the insolvent party’s financial embarrassment is known in the relevant market, the hypothetical purchaser will not be assumed to have knowledge of it. Accordingly, it is not relevant that Mr Quinn advised Mr Gaffney of Grampian’s financial difficulties. However, as the Grampian’s insolvency is, itself, a relevant circumstance, in that an insolvent vendor would be expected to manage its assets in such a way as to protect the interests of its creditors. The objective purpose of the sale is also a
relevant circumstance. While an off-market sale poses the obvious risk of obtaining an inadequate price, the Court would recognizes that a quick sale may sometimes be in the interest of the creditors, such as when the insolvent party faces liquidity issues and the sale would enable it to trade out of insolvency.

“34. Another relevant consideration, as the Inner House states, is the objective purpose of the sale. As is clear from the expert evidence in this case, there is generally a close relationship between the time which is spent on marketing a commercial property and the price at which it will sell. Such property, if sold in a hurry, will usually obtain a significantly lower price than if it were exposed to the market for a longer period. On the occurrence of insolvency, the requirement that the insolvent has regard to the interest of creditors points towards the hypothetical vendor in the objective assessment having to carry out an adequate marketing exercise to obtain a good price for the property. If the insolvent’s property is not exposed to the market but is disposed of by private sale, there is an obvious risk of an inadequate price. But there may be circumstances in which an insolvent, acting in the interests of its creditors, needs to achieve a quick sale. ……………………. ……………………….In such a circumstance, it may be objectively reasonable for the insolvent to accept the lower price from a quick sale of an asset in order to gain the chance of saving the business, as that outcome is likely to be in the interests of its creditors.”

The court then proceeded to suggest another scenario where there is no prospect that the sale would enable the insolvent company to remain in business, the adequacy of the consideration will depend on whether there is prejudice to the insolvent company’s creditors. This involves comparing the outcomes which would have been available in the circumstances of the insolvency. In cases where a full marketing exercise would not have been possible, or where the asset was being sold as part of an informal winding up, the consideration achieved in the sale should not be measured against the open market price but against the price, net of expenses, that would have been obtained by a liquidator of the company, or else by the holder of any security over the asset, assuming their compliance with applicable legal duties.

In the present case, the sale of the Property was part of an informal winding up of Grampian. As such, the Court considers that there could be no justification for an off-market sale at a price so far below market value on the ground of urgency therefore the court was of the view that  Carnbroe had not established that there was adequate consideration as it failed to lead any evidence to support the view that a sale by NatWest (as the holder of a standard security over the Property), or else by the liquidators, would have been likely to achieve a comparable or lower net price than that which Grampian accepted. Therefore, the Inner House was entitled to interfere with the Lord Ordinary’s assessment of the adequacy of the consideration.

As to the appropriate remedy, the liquidators argued that section 242(4) of the 1986 Act requires the courts to annul any transaction with an insolvent company for less than adequate consideration, save where such annulment is impossible. However, the Supreme Court considers that such a rule could produce harsh and disproportionate effects, since section 242(b) would capture sales to good faith, arm’s length purchasers for substantial consideration. If such a transaction were reversed, the good faith purchaser would be forced to compete as an unsecured creditor to recover the consideration it had paid, with the insolvent vendor’s general creditors receiving a windfall.

“51. But commentators on the statutory provisions have criticised the is proportionate consequence of annulling the transaction when the transferee has paid a significant albeit inadequate sum for the alienated property and is made to rank as an ordinary creditor in relation to his claim for unjustified enrichment: St Clair and Drummond Young, The Law of Corporate Insolvency in Scotland, 4th ed (2011), para 3.10. An order for the restoration of the property to the insolvent company, which leaves the transferee to prove in competition with other creditors for the price which it originally paid, not only is harsh on the transferee but also gives the general body of creditors an uncovenanted windfall as the company would not have received the price but for the impugned sale.”

In a departure from previous decisions of the Inner House, the Supreme Court concludes that the statutory words of section 242(4) are broad enough to allow the courts, in appropriate cases, to devise a remedy to protect the good faith purchaser. In the absence of agreed facts as to the impact of reversing the present transaction, the Court remited the case to the Inner House to determine whether it is appropriate to qualify the remedy it has given to take account of all or part of the consideration paid by Carnbroe for the purchase.

Please see the order