Regular readers will know that I believe there is a very strong case to say that the sale of assets of Rangers Football Club to Sevco (insert precise Sevco entity here) in June 2012 was not for full value.
That is NOT to say that anything illegal, criminal or underhand happened. Rather Mr Green managed to secure assets worth many millions of pounds for only £5.5 million. Despite his fall from grace, he is still up for Businessman of the Year, at least in my eyes!
It is my view that, subject of course to the detailed investigations carried out by the liquidators BDO, there is a strong case for asking the purchaser of the assets to prove that an adequate consideration was paid. As readers who can recall my previous posts on this topic will know, it is not for the liquidator to show that the price was too low, but for the buyer to show it was adequate. In addition, it is not necessarily the case that the best price received after a marketing process would be “adequate” in all the circumstances.
Now, a few posters have mentioned a piece posted on an English solicitors’ website which, in their view, seems to challenge my opinion.
Adam has recently mentioned the piece three times, and seems to want a response to it. So here goes …
The piece can be found on the website of Holmes & Hills LLP here.
The most relevant part, and that quoted to signify my alleged mistake, is as follows:-
Should assets be purchased for a bargain price from an insolvency practitioner, rather than the company directly, the sale cannot then be challenged on valuation grounds.
The article does not quote the authority for that proposition. Readers will know that I generally do quote authority for what I am saying, on the basis that, if I am suggesting an interpretation of a legal principle, people deserve more than simply my word. A properly sourced and evidenced view is worth more than bald assertion.
If it was correct however, then people rightly would wonder about me banging on about gratuitous alienation. After all the assets were bought “from an insolvency practitioner”, were they not?
Two matters arise.
First of all, the sale was by the company in administration, with the administrators acting as agents for the company. Therefore it could be argued that the sale was NOT directly from the insolvency practitioner.
However the second point is far more important.
The Holmes & Hills piece is referring to Sections 238 and 240 of the Insolvency Act 1986. They read as follows:-
238 Transactions at an undervalue (England and Wales).
(1) This section applies in the case of a company where—
(a) the company enters administration,
(b) the company goes into liquidation;
and “the office-holder” means the administrator or the liquidator, as the case may be.
(2) Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.
(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.
(4) For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—
(a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or
(b) the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.
(5) The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied—
(a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and
(b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.
240 “Relevant time” under ss. 238, 239.
(1) Subject to the next subsection, the time at which a company enters into a transaction at an undervalue or gives a preference is a relevant time if the transaction is entered into, or the preference given—
(a) in the case of a transaction at an undervalue or of a preference which is given to a person who is connected with the company (otherwise than by reason only of being its employee), at a time in the period of 2 years ending with the onset of insolvency (which expression is defined below),
(b) in the case of a preference which is not such a transaction and is not so given, at a time in the period of 6 months ending with the onset of insolvency,
(c) in either case, at a time between the making of an administration application in respect of the company and the making of an administration order on that application, and
(d) in either case, at a time between the filing with the court of a copy of notice of intention to appoint an administrator under paragraph 14 or 22 of Schedule B1 and the making of an appointment under that paragraph.
(2) Where a company enters into a transaction at an undervalue or gives a preference at a time mentioned in subsection (1)(a) or (b), that time is not a relevant time for the purposes of section 238 or 239 unless the company—
(a) is at that time unable to pay its debts within the meaning of section 123 in Chapter VI of Part IV, or
(b) becomes unable to pay its debts within the meaning of that section in consequence of the transaction or preference;
but the requirements of this subsection are presumed to be satisfied, unless the contrary is shown, in relation to any transaction at an undervalue which is entered into by a company with a person who is connected with the company.
(3) For the purposes of subsection (1), the onset of insolvency is—
(a) in a case where section 238 or 239 applies by reason of an administrator of a company being appointed by administration order, the date on which the administration application is made,
(b) in a case where section 238 or 239 applies by reason of an administrator of a company being appointed under paragraph 14 or 22 of Schedule B1 following filing with the court of a copy of a notice of intention to appoint under that paragraph, the date on which the copy of the notice is filed,
(c) in a case where section 238 or 239 applies by reason of an administrator of a company being appointed otherwise than as mentioned in paragraph (a) or (b), the date on which the appointment takes effect,
(d) in a case where section 238 or 239 applies by reason of a company going into liquidation either following conversion of administration into winding up by virtue of Article 37 of the EC Regulation or at the time when the appointment of an administrator ceases to have effect, the date on which the company entered administration (or, if relevant, the date on which the application for the administration order was made or a copy of the notice of intention to appoint was filed), and
(e) in a case where section 238 or 239 applies by reason of a company going into liquidation at any other time, the date of the commencement of the winding up.
What does that all mean?
Effectively, where a transaction takes place after the appointment of an administrator or liquidator, then the transaction cannot be challenged as being at an undervalue as, by definition, it is the administrator or liquidator completing the deal.
Keen eyed readers will have noted two things. First of all the words “gratuitous alienation” appear nowhere in the sections quoted. Secondly, and this is a slightly more concrete clue, Section 238 is headed “England and Wales”!
If one goes slightly further down the Act, one comes to Section 242. It says:-
242 Gratuitous alienations (Scotland).
(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;
(b) a company enters administration, an alienation by the company is challengeable by the administrator.
(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—
(a) a person who is an associate (within the meaning of the Bankruptcy (Scotland) Act 1985) of the company, a day not earlier than 5 years before the date on which—
(i) the winding up of the company commences, or
(ii) as the case may be, the company enters administration; or
(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, or
(c) that the alienation—
(i) was a birthday, Christmas or other conventional gift, or
(ii) was a gift made, for a charitable purpose, to a person who is not an associate of the company,
which, having regard to all the circumstances, it was reasonable for the company to make:
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.
(5) In subsection (4) above, “charitable purpose” means any charitable, benevolent or philanthropic purpose, whether or not it is charitable within the meaning of any rule of law.
(6) For the purposes of the foregoing provisions of this section, an alienation in implementation of a prior obligation is deemed to be one for which there was no consideration or no adequate consideration to the extent that the prior obligation was undertaken for no consideration or no adequate consideration.
(7) A liquidator and an administrator have the same right as a creditor has under any rule of law to challenge an alienation of a company made for no consideration or no adequate consideration.
(8) This section applies to Scotland only.
Here is the key to the confusion. The Holmes & Hills piece would be accurate, BUT ONLY IF RANGERS FOOTBALL CLUB PLC (now in liquidation) was in England or at least an English company.
However it was a Scottish company.
Sections 238 and 240 do not apply. Section 242 does.
Nowhere in Section 242, or indeed elsewhere in the Act, do we find a Scottish equivalent of the “exemption” where assets are bought from an Insolvency Practitioner. It could be argues why this is the case, but that is not for her and now.
Instead the answer to the puzzle about whether the Holmes & Hills piece is right, or am I is simple. If we were dealing with an English company and English assets the piece is quite right.
But we are in Scotland – so I am right!
Therefore, please do not bring up the Holmes & Hills post again.
Obviously my quest to bring legal education to the masses must continue!
Posted by Paul McConville