In between lots of real life stuff, there has been little chance to look at the Rangers Prospectus in some detail. I did look to see whether the issue of “gratuitous alienation” might be raised as a risk factor. It does appear to be covered, although obliquely.
I have seen frequent comments asking on what Rangers are going to spend the money which will be raised in the undoubtedly successful share issue, and why they are looking for the money now. To be fair all these are laid out in detail within the Prospectus, and that is where the answers are to be found. However, looking at contingencies, it is always possible that the funds, even though earmarked for one purpose, can be used for another where circumstances justify it. I am NOT suggesting that the Prospectus in any way misrepresents what the cash raised is for. However, if you have some money put away as a deposit for a holiday, but your car breaks down and needs expensive repairs done, it is entirely legitimate to use the reserve for that, and to replenish the funds later.
Against that back cloth I can see how it might be very advantageous to Rangers to have the share issue taking place now, and as successfully as appears to be the case.
For clarity in this piece, please note that:-
Rangers International Football Club PLC = RIFC/”the Company”;
Sevco Scotland Ltd = Rangers Football Club Ltd = RFCL;
Rangers Football Club PLC (now in liquidation) = RFC 2012 PLC = RFCPLC
Rangers Football Club = RFC/”the Club”.
Asset Purchase Agreement = the deal by which RFCL acquired assets of RFC = APA
Are you sitting comfortably? Then I’ll begin.
As required, the RIFC Prospectus details a number of “risk factors” for investors to consider. One which I was interested to see addressed was the possibility that the liquidator, BDO, or any creditor, could challenge the transfer of assets by the administrators of RFCPLC to Mr Green’s Sevco consortium.
This was originally intended to be to Sevco 5088 Ltd, but at some point in the process, not publicised, as far as I am aware, until after the transaction was complete the buyer became Sevco Scotland Ltd. Sevco Scotland Ltd changed its name to Rangers Football Club Ltd.
I have written about “gratuitous alienation” before, but want to give a quick recap before addressing what the Prospectus has to say about it.
Gratuitous Alienation – A Quick Guide
Normally the law does not protect someone from making a bad deal commercially, unless there has been misrepresentation or bad faith. So where someone is tricked into a deal the law can, in some circumstances, provide redress for the innocent party, either by the transaction being reversed or damages awarded.
However, insolvency, whether administration or liquidation of a company or sequestration of an individual, provides a rare occasion where the courts will interfere with a “bad deal”.
This is not in the interests of the party making the deal. But instead of their creditors, so the general principles still apply. It is not the entity which made the mistake which benefits from any action.
In Scotland Section 242 of the Insolvency Act, the relevant sections of which are at the foot of this article, applies.
Where the assets of a company, or rights it has, are sold or otherwise disposed of within two years before the liquidation, then the liquidator or any creditor can challenge the transaction. If the challenge goes to court, the court shall reduce (the Scottish legal term for “quash”) the transaction and restore the assets to the company, or make “other redress as appropriate” unless the person seeking to uphold the transaction satisfies the court that certain conditions apply. I will look at these in detail in this context below.
The effect of a successful challenge is that the assets are returned to the insolvent company.
It should be made clear that there is no need for there to be bad faith or underhand behaviour by anyone, although that does occur from time to time.
Why Is This a Risk Factor for Rangers?
The assets which made up Rangers, and which are now assets of Rangers Football Club Ltd, were bought from the company then in administration for £5.5 million. There is evidence suggesting that the assets are now valued at significantly more than the sale price (much of this from the public utterances of the Rangers directors and from the Prospectus itself).
It is possible that a creditor or BDO, the liquidator, could challenge the deal on the basis that the creditors have been prejudiced. After all, the creditors “pot” benefited only by £5.5 million, when it could be argued that it should have been enhanced much more.
If there is a challenge, then at the very least, time and money will be spent in fighting it.
Should a challenge succeed, then it could leave Rangers’ assets being returned to the liquidator, or a large bill having to be paid to retain them.
What Does The Prospectus Say?
The relevant extract from the “Risk Factor” section reads as follows:-
The business and assets of the Club were acquired by RFCL from the administrators of RFCPLC. Upon completion of the Acquisition, RFCL will become a wholly owned subsidiary of the Company.
Uncertainty in relation to potential liabilities may arise from the appointment of the liquidators of RFCPLC and the termination of the office of the administrators of RFCPLC.
The Directors consider that the risk of liabilities, other than as may be referred to in this document, has been mitigated by the competitive bidding process as a result of which RFCL acquired the assets and business under the APA, the terms of the APA itself which do not provide for RFCL to assume any liabilities and the fact that RFCL has acted in good faith as a bona fide purchaser on arms length terms.
Whilst RFCL cannot be certain that a liquidator or a creditor of RFCPLC would not seek to try to establish grounds under the provisions of the Insolvency Act 1986 to challenge the acts of the administrators of RFCPLC, the Directors consider that all necessary steps have been taken to ensure historic liabilities of RFCPLC remain with RFCPLC and that the APA is valid, binding and enforceable. There remains a risk that any such claim against the RFCL Group or the Rangers Group by a creditor or the liquidator of RFC 2012 plc would result in management time and attention being diverted from the operation of the business.
What Does That Mean?
The RIFC position is that RFCL did not acquire any liabilities of RFC2012, only assets. The only liabilities resting on RFCL are those accepted regarding football debts as part of the agreement allowing Rangers SFA membership.
They refer to there being “a competitive bidding process” for the assets of the Club.
They state that the APA is “valid, binding and enforceable” and that RFCL acquired the assets “in good faith as a bona fide purchaser on arms length terms.”
So everything was above board – RFCL won a competitive auction so, by definition, their’s was the best price – RFCL acted in good faith – the APA is not invalid and it is binding.
The only potential “downside” is that management time might have to be spent dealing with a claim, the implication being that such a claim would be spurious and unfounded.
So What is There to Worry About?
Whilst most of the points put forward in this section of the Prospectus are valid, they do not, in my view, deal at all with the potential for a challenge in respect of a gratuitous alienation.
Initially of course the only relevant opinion is that of BDO. I noted speculation elsewhere that BDO had already decided not to pursue that issue. That could be correct, but I would be dubious. Liquidations take a long time, especially where there are issues to explore regarding the conduct of directors.
In the case of RFCPLC, the liquidators are entitled to look back at the running of the business both during its latter days owned by Murray International and also through the whole period of Craig Whyte’s tenure. They also have the dealings of Duff and Phelps, as administrators, to look at.
It would therefore be very surprising, and unprecedented in a liquidation of this scale, for BDO to have ruled out a challenge as a gratuitous alienation already. Even if they had, that would not preclude a creditor making such a challenge. Equally it would be very quick for BDO to announce that it was challenging the transaction. Such a move, if it comes, will not be until next year, and well into the year.
As an example of the time a liquidation takes, Craig Whyte’s “Vital” company went into liquidation in 1995. The liquidation process did not end until 2002. The debts owed in that case were around £1 million.
As I said, where there is a challenge by a creditor or liquidator, the court SHALL reduce the transaction unless one of the following is established by the person looking to uphold the deal:-
(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.
Dealing with subsection (a), on the sale of the assets in June 2012, the assets comprised the purchase price of £5.5 million, plus what was left in the bank. The debts, even ignoring Ticketus and the Big Tax Case, run to many millions of pounds. So subsection (a) does not apply.
We come to subsection (b) – was the alienation made “for adequate consideration”?
What is “Adequate” Consideration?
The legal principles are fairly simple – but the application is not.
There are three leading cases, and I have written more detailed analyses of each at the foot of this piece. The cases are:-
- Short’s Trustee v Chung 1991 S.L.T. 472;
- Lafferty Construction Ltd v McCombe 1994 S.L.T. 858; and
- McLuckie Brothers Ltd v Newhouse Contracts Ltd 1993 S.L.T. 641.
Put shortly, the authorities make clear the following, I would suggest:-
- It is for the party seeking to uphold the transaction to produce evidence that the consideration was adequate – not for the liquidator or challenging creditor to produce evidence it was inadequate.
- Adequate consideration does not necessarily mean, with the benefit of hindsight or otherwise, the best price which could have been obtained in the open market in a properly conducted arms length transaction.
- Equally, even if the price was the best achieved in the sale process, this does not necessarily make it an “adequate” consideration.
- The consideration should be not less than would reasonably be expected in the circumstances, assuming that persons in the position of the parties were acting in good faith and at arms length from each other.
- What price would have been achieved in a “businesslike” transaction?
- Was there a proper approach to the sale, and was it conducted in a businesslike manner?
- There is no requirement for bad faith to be proved, nor even any need for it to be alleged.
How Does This Apply To Rangers?
According to the Prospectus, the balance sheet as at 31st August 2012 for RFCL showed “non-current” assets of £63,465,000. These consisted of the “Property, Plant and Equipment” valued at £43,456,000 and Intangible Assets of £20,009,000.
The property, plant and equipment would principally consist of Ibrox and Murray Park.
The intangible assets are the player values and goodwill, as accountants would call it, or the history, titles and “Rangers-ness” of the club, which we have seen is very important to the support.
The Prospectus states that:-
“On 14 June 2012 RFCL purchased the trade and assets of RFC 2012 plc, which was in administration. Under the sale and purchase agreement the total value of the assets was recorded as £5.5 million. Fair value adjustments have been made as per below.”
These “fair value” adjustments add:-
£5 million to the value of the stadium and training facility;
£220k to the value of other properties, plant and equipment;
£825k to the value of player registrations; and
£16,042,000 to the value of the “brand”.
Then, having made these “fair value adjustments” the balance sheet proceeds to “revalue” the assets further.
The Prospectus states:-
At the balance sheet date the Directors valued the Freehold Properties, comprising Ibrox stadium and Murray Park training facility based on a value in use calculation of the net present values of future operating cash flows. The key assumptions in this calculation are the expected future cash flows and the use of a weighted average cost of capital of 12.25 per cent. The value in use calculation relates to all fixed assets of the RFCL Group, including Intangible Assets. If required the PPE valuation would be capped at the depreciated replacement cost (DRC) valuation as the stadium and training facilities are specialist assets. The DRC valuation which represents a combined value of £79.2 million, has been performed by DM Hall LLP, independent valuers, not connected to the RFCL Group.
The revaluation adds £33,988,000 to the value of the fixed assets.
So we have an asset value, after the “fair value adjustment” totalling over £27 ½ million.
After revaluation the asset value is over £63 million.
Sevco Scotland Ltd, now RFCL, paid £5.5 million for those assets (and more).
Even if there was nothing underhand or illegitimate about the deal (and there is no suggestion that there was) I find it very hard to see how a company can value assets it has acquired for £5.5 million at in excess of £63 million six months later, and NOT fear a gratuitous alienation challenge.
RFCL has NOT invested millions in players or infrastructure, all of which could justify the value increasing.
Indeed, what was sold for £5.5 million was an SPL team, with many players on its books who might have raised many millions in transfer fees.
What is now valued at in excess of £63 million is an SFL3 team, most of whose most valuable players left for nothing under TUPE (though that is of course still in dispute). One wonders what the Directors would have valued Rangers at if still in the SPL!
I have yet to see a convincing explanation from Mr Green as to how they can sell shares in a business worth all that money, when it was acquired for £5.5 million, and this NOT be a gratuitous alienation!
In addition, the sale process, which is explained at length by Duff and Phelps in its paperwork, was not the full, open and disclosed sale process which might exist elsewhere. The assets were never advertised for sale in a newspaper for example. Now the sale of a football club is not the same as selling a bankrupt hotel or development site, but the process of attracting bidders seemed to go on behind closed doors. And there were bidders offering more, though the conditions could never quite be resolved, and indeed Walter Smith’s consortium offered more on the day of completion than RFCL paid.
At the very best Duff and Phelps made a terrible deal, and the effect has been gross prejudice to the creditors. Mr Green is quite entitled to take advantage of the administrators’ apparent desire to finish the deal off in a hurry. The courts would not protect Duff and Phelps from the consequences of the deal. However, the Insolvency Act empowers the court to protect the creditors from such a bad deal, without the necessity of having to take action for negligence or malfeasance against the administrators, which in all probability would be very difficult to establish.
In my view the gap between what was paid and what the assets are now valued at is so large that a court would find it almost impossible to agree that “adequate” consideration was paid.
What Can BDO Do and What Might Happen?
The first thing to note is that, if my understanding of the details in the prospectus is correct, the assets will remain owned by RFCL. However, RFCL will be owned 100% by the shareholders of RIFC. But this means that RIFC will NOT own Ibrox or Murray Park. Equally, the footballers are going to be employees, as they presently are, of RFCL, not RIFC.
So, if BDO challenges the deal, it will not be an action against RIFC directly. Any proceedings would be against RFCL.
As the Prospectus describes the intended corporate structure:-
On completion of the acquisition of RFCL pursuant to the Share Exchange Agreement, the Company will become the parent company of the Group. The Company will be a holding company with direct and indirect interests in the subsidiaries of the Group, principally RFCL, which it will acquire in accordance with the Share Exchange Agreement. The Group’s business is currently conducted solely through RFCL and its subsidiaries and on completion of the Acquisition, the Group’s business will be conducted solely through the Company and its subsidiaries.
The assets will remain in the name of RFCL. If pursued by BDO, then there is the possibility (in theory) that the court would order the assets to be returned to the liquidator by RFCL, not RIFC.
Bearing in mind that those assets effectively make up all the assets owned by RIFC, then how would the holding company react? Indeed, the assets in that circumstance would be worth more to RIFC than to anyone else.
Would it let the assets disappear back to the liquidator, and the whole auction process would start again? Hardly. After all, we would have a situation where many millions of pounds had been raised in a share issue. RIFC would be unlikely to allow the assets underpinning that value to go back to the liquidator.
And here is, I think, the answer to what the money now being raised might end up being spent on.
RFCL faces the possibility that a court will declare that £5.5 million was not “adequate” consideration. Standing that the “adjusted” asset value came to over £27½ million, and the “revalued” value to in excess of £63 million, then a court might find it very simple to determine what “adequate consideration” would have been – just pick either of those figures!
Let’s say that a challenge is forthcoming to the transfer of assets. The liquidator is faced with a long and expensive legal battle, which could result in long hearings of evidence, days of legal argument, and appeals to the Inner House and thence to the Supreme Court. If BDO end up winning, then it would be possible that they could be awarded, for the creditors, another £50 million. However, they could end up with a lot less, and indeed could end up with nothing.
However, what would the liquidators say if a party offered to pay, say, £15 million into the creditors’ pot to avoid expensive and time-consuming proceedings?
At least it would mean that the creditors would get something, subject of course to Mr Whyte’s Floating Charge not coming back into the picture! Could BDO justify spending the creditors’ dwindling funds to look for the pot of gold. After all, if the cash in the liquidated company is spent, the creditors need to fund the liquidator till he gets funds in.
My suspicion therefore is this – that it will turn out to be very fortunate indeed for RIFC if, when BDO comes knocking on the door, they happen to have millions sitting in a high interest bank account or its investment equivalent. It is a bit like putting your wages by, and then having to replace two tyres on your car – you were not budgeting specifically for that, but you had the cash there for unforeseen emergencies.
Could Mr Green and his cohorts have been able to fund an initial purchase of Rangers in June if the price to be paid was £20 million? That is unlikely, although not impossible. A cynic might then suggest that the plan was to get “in the door” by paying the knockdown price, and then to initiate a share issue as soon as possible which could be used as a nest egg against more having to be paid to complete the purchase.
And it will generally be far cheaper to raise the money in a share issue than to borrow it from the bank. So, the cynic might suggest that Mr Green saw that having a share issues was the best, and possibly only, way for him to achieve success in the purchase. If so, then he deserves further acclaim as Businessman of the Year.
Clearly the cynic would be wrong, as RIFC has made clear what the destination of the funds will be. However, the Directors quite legitimately have discretion on how they spend the company’s money. If they end up using it to satisfy the liquidators, then this would seem to be an all-round success:-
- The creditors of RFCPLC would receive extra money;
- BDO and RFCL would be speared years of litigation;
- RIFC would be able to proceed onwards without distraction from these issues; and most importantly
- I would be able to stop writing about gratuitous alienations!
My speculation is simply that.
BDO and the creditors might decide not to make any challenge.
RFCL might decide to fight any case raised.
A court could decide that what the administrators did was enough to render Sevco’s bid to be “adequate consideration”.
But my scenario detailed above seems to me to be something which fits the bill, and meets the issues which have been speculated on about the need for a share issue and its timing. Maybe this has been lurking in the subconscious of Mr Green, and will only come into focus once he sees the issue arise in reality.
As I have said – Charles Green for Businessman of the Year!
Posted by Paul McConville
Additional Information – The Insolvency Act 1986 and three case comments
(1)Where this subsection applies and—
(a) the winding up of a company has commenced, an alienation by the company is challengeable by—
(i) any creditor who is a creditor by virtue of a debt incurred on or before the date of such commencement, or
(ii) the liquidator;
(2) Subsection (1) applies where—
(a) by the alienation, whether before or after 1st April 1986 (the coming into force of section75 of the Bankruptcy (Scotland) Act 1985), any part of the company’s property is transferred or any claim or right of the company is discharged or renounced, and
(b) the alienation takes place on a relevant day.
(3) For the purposes of subsection (2)(b), the day on which an alienation takes place is the day on which it becomes completely effectual; and in that subsection “relevant day” means, if the alienation has the effect of favouring —
(b) any other person, a day not earlier than 2 years before that date.
(4) On a challenge being brought under subsection (1), the court 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, …
Provided that this subsection is without prejudice to any right or interest acquired in good faith and for value from or through the transferee in the alienation.
Short’s Trustee v Chung 1991 S.L.T. 472
This case related to a personal, rather than a corporate, insolvency but the legislation regarding gratuitous alienations is almost identical.
Lord Weir stated:-
“The pursuer instructed an experienced chartered surveyor, Mr John McKinney of Robert Galbraith & Lawson, to make a valuation of the flats as at October 1986. … Mr McKinney gave evidence. … From his knowledge of the sale of comparable property in the immediate neighbourhood and from a study of the records of other sales and using a valuer’s appraisal of this material, Mr McKinney concluded that the flats would fetch in the general area of £15,000 each on the open market as at October 1986. … These figures, as he made clear, also took into account a possible difficulty in selling these properties due to funding being difficult to obtain.
I accepted entirely the evidence of Mr McKinney and the conclusions which he reached. Although he was ably cross examined there was no evidence from a valuer led on behalf of the defender, notwithstanding that the onus under s. 34 (4) of the Act of establishing that the alienation was made for adequate consideration rested on her.
It is plain to me that Mr Meikle (who sold the properties to the now bankrupt Mr Short), for whatever reason, had no interest in obtaining anything beginning to approach a market price for the flats and he seemed satisfied that he was rid of them. The debtor did not seem to me to be seriously interested in the property market and no doubt an increase of £1,000 in the price of the flats over a period of a few months would have been enough for him. In my opinion these transactions in no sense represented a proper testing of the market. There was no advertisement, surveyors were not brought in to advise and the circumstances of the sales do not disclose a businesslike attitude to property dealing.
In approaching the question of whether an alienation was made for adequate consideration, it is necessary to bear in mind that the word “adequate” is not defined in the Act. Counsel for the defender submitted that it would be wrong to reach an opinion on this question, as the pursuer had sought to do, by making a valuation based on hindsight and on an objective analysis of valuation evidence. He contended that subjective considerations concerning the actual circumstances of the transactions at the time were material and relevant. Counsel for the pursuer on the other hand submitted that it was an objective test.
This is not a case in which it is necessary to embark on a comprehensive discussion of these questions and I can see that in some instances to reach an answer may not be a particularly easy task. As at present advised, I am not persuaded that it is necessary for the person who is seeking to uphold the transaction to demonstrate that an adequate consideration for the sale of heritable property necessarily means, with the benefit of hindsight or otherwise, the best price which could have been obtained in the open market in a properly conducted arms length transaction.There may well be cases where, for particular reasons, the consideration has turned out to be less than that but still be “adequate” for the purposes of s. 34, and it may be relevant to examine the circumstances in which a transaction took place. However, in this instance, such matters hardly arise. Even making every allowance for the imprecision of a valuer’s estimate, the difference between the valuations made by Mr McKinney and the sale prices actually obtained are so wide as to leave no room for doubt. The situation might have been different if valuation evidence for the defender had been led and had indicated a lower value for these properties. The defender has failed to satisfy me that the consideration for the alienations to her late husband begins to approach adequacy. A businesslike transaction in my opinion would have resulted in a price approaching the amounts spoken to by Mr McKinney.” (All emphases added)
What does this tell us?
It is for the party seeking to uphold the transaction to lead evidence of its adequacy, not for the liquidator to prove its inadequacy.
An objective valuation with hindsight might not be conclusive where there circumstances justifying a lower than commercial price, but in those circumstances the details surrounding the transaction would need to be examined.
There ought to be some testing of the market by the seller, or else some proper explanation as to why there has not been such a testing of the market. As Lord Weir said in this case “There was no advertisement, surveyors were not brought in to advise and the circumstances of the sales do not disclose a businesslike attitude to property dealing. “
How wide is the difference between the valuation suggested, perhaps by the liquidator, and that actually achieved?
Do the proceeds of sale seem consistent with a “business-like” transaction?
It should be noted that there is no need to suggest any improper motive on the part of the seller. The seller might believe they are getting a fair price, but the court will use hindsight in assessing this, unless specific circumstances suggest otherwise.
In Lafferty Construction Ltd v McCombe 1994 S.L.T. 858 Lord Cullen considered the application of Section 242.
The pursuers were a company in liquidation and its liquidator. The winding up of the company commenced on 10 July 1989. The defender was the widow of a director and minority shareholder who died on 29 July 1985. On 25 March 1988 the company paid the defender £50,000 and delivered to her the registration documents of a Mercedes motor car registration number JMC 666. The pursuers sought declarator that the payment and transfer of ownership of the motor car were gratuitous alienations within the meaning of section 242; and sought decree for payment of £50,000; and, failing restoration of the motor car, payment of £20,000 as representing its value.
The defender claimed that solicitors acting for her and the executors of her late husband complained to Frank Lafferty, the majority shareholder in the company and in Rent A Skip Ltd, that the affairs of those companies were being conducted in a manner which was unfairly prejudicial to the interests of minority shareholders and proposed that their shares in those companies be purchased. Following discussions agreement was reached between solicitors acting for the company on the one hand and for the defender and the deceased’s executors on the other whereby (1) the sum of £50,000 was to be paid by the company to the defender; (2) the motor car referred to above was to be made over by the company to the defender free of all outstanding debts, and (3) an annuity of £20,000 per annum in favour of the defender was to be arranged by the company and to endure for a minimum of 10 years. The settlement was not paid by the company so Mrs McCombe raised court action and, in return for loosing certain arrestments she had lodged, she was paid the £50,000 and the car transferred to her. She claimed adequate consideration had been given.
Lord Cullen held:-
“… the crucial matter, as it appears to me, is whether the defender has made adequate averments to enable the court, if these averments are proved, to determine that the payment and delivery were for adequate consideration, whether they were in consideration of the settlement or in consideration of the withdrawal of the diligence or the other terms of the 1986 agreement.
In considering whether alienation was made for “adequate consideration”, I do not take the view that it is necessary for the defender to establish that the consideration for the alienation was the best which could have been obtained in the circumstances. On the other hand the expression “adequate” implies the application of an objective standpoint. The consideration should be not less than would reasonably be expected in the circumstances, assuming that persons in the position of the parties were acting in good faith and at arms length from each other. In the present case the defender, apart from the bare statement that adequate consideration was given for the payment and delivery has made no attempt to place any quantification, however broad, against any of the possible considerations. …
As I have already noted the defender’s argument was that it was enough for her to rely on the fact that the parties acted at arms length and that there was no suggestion of fraud, dishonesty or connivance. I observe in passing that the defender’s pleadings do not in terms rely on these matters. However, the more fundamental objection to this approach is that it seems to me to fail to address the need to establish that the consideration was, in an objective sense, adequate. The defender’s averments, if proved, would in my view not be sufficient to enable the court to determine that the payment and delivery were for adequate consideration.”
Once more therefore we see that an objective element is essential in the valuation, although the purchaser does not have to show that the price paid was the maximum achievable.
As Lord Cullen said “The consideration should be not less than would reasonably be expected in the circumstances, assuming that persons in the position of the parties were acting in good faith and at arms length from each other”.
Finally I would refer to a decision of Lord Milligan in McLuckie Brothers Ltd v Newhouse Contracts Ltd 1993 S.L.T. 641.
A company acquired certain lands for development for housing. They commenced building operations and in October 1989 entered into missives for the sale of the partly developed site to a second company for £330,000. The price actually paid was £353,515.31 to include certain works allegedly carried out after the date of the missives. The first company subsequently went into insolvent liquidation and a creditor of that company and the liquidator sought reduction of the disposition in favour of the second company. The second company contended that the sale was for adequate consideration. It led evidence that the price had been arrived at by taking into account the final price to be expected for the houses on the development and the cost of completing the development, allowing for contingencies. No details of such prices and costs were produced. Evidence was also led from an architect who valued the works carried out by 12 July 1989 at £257,650. The site was valued at £106,000. Certain works had been carried out to the buildings between 12 July 1989 and the date of the missives, some of which had been remedial works rendered necessary following the issue of a stop notice by the local authority in August 1989. The liquidator led no evidence and contended first that there was no evidence to show that the figure of £330,000 was adequate consideration, and secondly that what evidence there was pointed to a valuation in excess of £363,000.
Lord Milligan, being referred to Lord Weir’s decision in Short’s Trustee v Chung said “I agree with Lord Weir’s observation on this point, and in particular that a defence based on adequate consideration will not necessarily fail because after the event it appears that the price actually obtained might have been bettered.”
He noted that “Counsel for the pursuers submitted that the defenders had failed to establish that the alienation was for adequate consideration. He said that there was no proper evidence at all to suggest that the figure of £330,000 represented such adequate consideration”.
He went on to hold:-
“However, my firm view is that the defenders have failed to establish that the price of £330,000 represented an adequate consideration for the part developed site in terms of s 242 of the Insolvency Act 1986. … I have no clear detailed picture as to just what work was done between the July valuation and the October sale. What I do find is that the evidence showed that on a balance of probabilities sufficient work of a nature enhancing value was done during that period to have a material effect upon the value of the development between those two dates. While I am satisfied on that point on a balance of probabilities, the evidence does not enable me to quantify the extent of that increase.
I was left with the clear impression from Mr Alex Smith’s evidence that his offer of £330,000 related to the particular circumstances in which that offer was made. Those particular circumstances included the obvious financial problems of Newhouse Construction Ltd, the knowledge that Mr Francis Smith knew that he would be engaged as site agent by the defenders if the defenders’ offer was accepted, the absence of a competing bidder and of meaningful advertising of the sale and the perfectly understandable desire of Mr Alex Smith to achieve as low a price as he could in the rather special circumstances of this particular sale. With regard to advertisement I do not accept Mr Alex Smith’s evidence, supported though it was by that of Mr Francis Smith, that the site was advertised for sale, at least that it was so advertised in any meaningful way. If it had been, I cannot envisage that Mr McEwan would have been unaware of that, visiting the site every fortnight as he did. I accept Mr McEwan’s evidence that he had no knowledge that the site was being advertised for sale and also his evidence that he, initially at least, had no knowledge of the actual sale. In view of each of the foregoing circumstances, I do not find the offer made by Mr Alex Smith and agreed to by Mr Francis Smith to be of any substantial significance towards ascertaining what was adequate consideration for the alienation concerned.
I record that counsel for the defender founded upon the absence of any evidence from the pursuers. Upon my view of the evidence led for the defenders the absence of any evidence from the pursuers cannot avail the defenders. I would add that I find it difficult to see how the pursuers could have been expected to produce even an approximately accurate valuation of a partly developed site when the defenders cannot prove in reasonable detail the state of the site at the material time, a matter very much for the defenders to establish.”
Once again the emphasis is on the obligation of the purchaser to prove that adequate consideration has been given. The failure to have an open marketing process can affect that assessment. It will not be enough to say that the price paid was the best offered. Indeed higher offers were made, but D+P rejected them in connection with their attached conditions.
If the court finds that adequate consideration has not been given, then the transaction is reduced. The property acquired would go back to the seller, in this case the liquidator of RFC PLC. Sevco would be due back the money it had paid, but would then be a creditor of the liquidated company.
There is an exception to the rule where any right or interest is “acquired in good faith and for value from or through the transferee in the alienation.” Therefore, if Sevco found someone to pay the full value, and this transaction was in good faith and for value, then the court could not reduce the transaction, However Sevco, in this example, would be pursued by the liquidators for the Windfall profit made. In addition, it might be asked how, against the background of what would likely be highly publicised court proceedings, anyone could truly buy the assets “in good faith”.