Property dealings struck down as gratuitous alienations

The Supreme Court recently considered conjoined appeals from the Inner House in respect of three companies that went into administration in 2011 (Brown v Stonegale Ltd [2016] UKSC 30). Nine months prior to administration, four properties were transferred to Stonegale Ltd and to Mr Pelosi junior, the sole director and shareholder of that company. The administrators successfully brought proceedings to set aside those transfers as gratuitous alienations and Mr Pelosi was ordered to pay £125,000 he had received for the sale of one of those properties.

None of the findings of fact at first instance were challenged. One of those was that Mr Pelosi senior had orchestrated a fraud on the bank which had financed the group of companies whereby it was induced to grant a discharge over five properties, whereas only one had in fact been sold. The four properties thereby free of security were then disponed to the defenders for no consideration. Even although there was a reduction in borrowings from the bank, there was no reciprocity between the disposal of the four properties and the earlier payment made to the bank.

In those circumstances the court held that the purpose and effect of those transactions was to divert assets away from the companies’ creditors, which was exactly what s 242 of the Insolvency Act 1986 is aimed at preventing. It was also immaterial that the administrators could have invoked other remedies, as the court was required to address the particular dispute before it.