Sale of company’s principal asset for half market value was not a ‘gratuitous alienation’, judge rules

A judge rejected the claim that the sale amounted to a “gratuitous alienation” and ruled that the price paid was “adequate consideration” for the property.

Lord Woolman heard that Grampian MacLennan’s Distribution Services Limited formerly ran a distribution service throughout Scotland and beyond, with customers including Tesco and Cadbury.

The company, which was owned by Derek Hunter and his wife Hazel Hunter, had several depots but the centre of its operations and principal asset was an industrial unit on the Kelvin Industrial Estate in East Kilbride, which they purchased for £630,000.

However, Grampian developed financial problems and by 2014 it owed sums totalling over £1 million to its principal creditors, HM Revenue and Customs (HMRC) and the National Westminster Bank plc (NatWest).

Grampian was sold by the Hunters in July 2014 to Kevin Quinn, who discussed the position with Christopher Gaffney, the sole shareholder and director of a haulage, plant hire and property company called Carnbroe Estates Limited with whom he had had business dealings for over 30 years.

Prior to Mr Quinn’s acquisition of Grampian, Carnbroe had expressed an interest in the property and indicated that it might be willing to purchase the property for £900,000 although no offer was made, but on learning of the company’s worsening financial predicament Mr Gaffney thought that he might be able to secure a deal on advantageous terms.

Carnbroe approached the Bank of Scotland for a loan to facilitate the purchase of the property and the bank instructed a valuation from DM Hall, which confirmed a valuation of around £1.2 million, falling to £800,000 on the assumption of a restricted 180 day marketing period.

The bank was concerned about the seemingly low purchase price, but following discussions between Carnbroe’s solicitors and the surveyors and advice to the effect that with a 90 day window the property valuation could be reduced by 50%, the bank advanced £600,000 to Carnbroe in August 2014.

Grampian sold the principal asset – which comprised a warehouse depot, a vehicle workshop, and a yard with a gatehouse – to Carnbroe, with the disposition stating that the purchase price was £550,000.

On the settlement date, however, Grampian did not receive any payment as Carnbroe paid £473,604.88 to Natwest, which was the amount of the company’s outstanding debt under its loan facility, and it was not until June 2016 that Carnbroe paid the balance of the purchase price to the liquidators.

As Grampian did not receive the proceeds of the sale it was unable to meet its tax bill and HMRC lodged a petition to wind up the company in respect of £550,000 of unpaid taxes.

Following the appointment of a provisional liquidator in September 2014 the company’s creditors appointed the pursuers Stewart Macdonald and Pamela Coyne as the joint liquidators of the company.

After reviewing the sale the liquidators decided to challenge the transaction as a gratuitous alienation, arguing that the market value of the property was roughly double the purchase price, but Carnbroe’s position was that it did give adequate consideration because the transaction was a “distress sale”.

The court heard the evidence of two experienced surveyors at the proof, Iain Prentice of Colliers International and Alistair Buchanan of Shepherds.

Mr Prentice valued the subjects at £820,000, while Mr Buchanan valued the subjects at £740,000, but both were market values, in that the valuations assumed a bargain between a willing seller and buyer at arm’s length with a proper marketing period and no element of compulsion.

The two surveyors agreed that difference between their two figures was less than 10%, which is an acceptable tolerance within the surveying profession, and that a discount of 25% to 30% would be acceptable if marketing was restricted to six months, with a further discount possible under “more stringent marketing conditions”.

The pursuers submitted that the consideration was less than could reasonably be expected in the circumstances, had the parties been acting at arms’ length in good faith.

Counsel relied on (i) the 2006 purchase price, (ii) the DM Hall valuations, (iii) the expressions of interest by Carnbroe, (iv) the fact that it was an “off-market” transaction, (v) the links between Mr Quinn and Mr Gaffney, and (vi) Carnbroe’s failure to pay the full price at the time.

Counsel for the defenders contended that Carnbroe paid an adequate consideration in the “real world” circumstances that prevailed, as Grampian was “fighting for its survival” and Mr Quinn had to make a quick decision.

In a written opinion, Lord Woolman said: “I conclude that Carnbroe has established that £550,000 did constitute adequate consideration for the property. While the purchase price fell short of the open market value, Grampian had very limited options. It was in a perilous financial position. It could not afford the leisure of a lengthy marketing period. Natwest was threatening to call up the standard security and to use other diligence against it in terms of the bond and floating charge it held. There was no other offer on the table. The earlier expressions of interest were just that. There was no solid proposal to accept.”

He added: “Mr Quinn and Mr Gaffney were not ‘associates’ in terms of the legislation. Nevertheless their long business relationship justifies very close scrutiny of the transaction. Both independent surveyors said that a price of about £555,000 was not unusual or inappropriate if the property had been marketed on a closed basis for a period of six months. Mr Prentice said that if the open market valuation was taken to be £740,000, then in respect of the agreed purchase price ‘ordinarily I don’t think it would raise an eyebrow’.”

In those circumstances the judge concluded that a price of £550,000 was adequate consideration.

He further held that £473,604.68 was “inadequate consideration” for the property and accordingly the liquidators were justified in raising the action.