Transferees fail in Supreme Court over gratuitous alienations ruling

Transferees of properties from three companies that went into administration have failed in an appeal to the Supreme Court against a decision setting aside the transactions as gratuitous alienations.

Five justices unanimously dismissed the appeal by Stonegale Ltd and Norman Pelosi and agreed with the Court of Session that the administrators of three companies that had been controlled by Mr Pelosi's father were entitled to have three dispositions set aside and Mr Pelosi ordered to repay the proceeds he had received on the sale of the fourth. The properties had all been transferred nine months before the companies entered administration.

Lord Reed, with whom Lords Neuberger, Sumption, Carnwath and Hodge agreed, said that the appellants’ submission that the administrators could have pursued a number of alternative remedies was not relevant to the issue the court had to determine, which was whether the respondents were entitled to the remedy they sought on the basis that the four dispositions were gratuitous alienations.

The gratuitous nature of the alienations was plain and obvious, he continued. The creditor bank, which held standard securities over five properties, was advised that they had been sold for a total of £2,414,000. One of these properties, disponed for £762,000 (corresponding to an earlier valuation) to a company also owned by Mr Pelosi senior, was resold the same day for £2,467,500.

The sum of £2,414,000 “in respect of purchases of [the five properties]” was remitted to the bank, which then executed discharges of the standard securities over all five properties. The Lord Ordinary found that “the bank was misled in relation to the funds it received”. Of the other four properties, three were then disponed to Stonegale and one to Mr Pelosi junior. Nothing was paid for these properties. A loan agreement involvong the same companies and signed by Mr Pelosi junior was found by the Lord Ordinary to be a sham, “concocted purely for the purpose of the defence of these proceedings”.

There was no reciprocity between the disposal of the four properties, which were gifted to Stonegale and Mr Pelosi junior, and the earlier payment to the bank. The transactions had the purpose and effect of diverting assets from the companies’ creditors, which was exactly what s 242 of the Insolvency Act 1986 was intended to prevent.

Click here to view the judgment.