An action has successfully been brought by the administrators of Questway Limited, Oceancrown Limited and Loanwell Limited (all in administration) against Stonegale Limited and Norman Ralph Pelosi (the sole shareholder and director of Stonegale Limited) to reduce alienations of properties in Glasgow, under s.242(1) of the Insolvency Act 1986 (the “Insolvency Act”).

The companies were part of a group of companies controlled by Ralph Norman Pelosi (senior) and Questway had a direct facility with Anglo Irish Bank (cross-guaranteed by other companies within the group).

The transactions being challenged concerned sales of various properties in Glasgow in November 2010. One of the properties (278 Glasgow Road, Rutherglen) was to be sold to one of the group companies (for £762,000) and then immediately sold on to a third party (unknown to the Bank) for around £2.1m, pursuant to a previous agreement between that third party and Mr Pelosi. The Bank had been advised that the total sale proceeds for all the properties was £2,414,000 and on this basis, the Bank had agreed to discharge the securities that it held over all the properties. Once 278 Glasgow Road had been sold on to the third party, and those sale proceeds transferred to the Bank in return for the discharges, the remaining properties were then transferred to Mr Pelosi junior (although it was accepted by all parties that no money actually changed hands, although the relevant dispositions recorded a total of £1.65m).

The court was asked to decide whether the transactions truly were gratuitous alienations – the Insolvency Act allows a defence to the challenge if it can be shown that adequate consideration was paid to the seller.

The defender’s counsel argued that adequate consideration had been paid – this was on the basis that the total sale proceeds reflected the open market value of the properties and this had been paid over to the Bank. Payment of the sums reduced the indebtedness of Oceancrown to the Bank and that the value received was the reduction of Oceancrown’s liability to the Bank.

However, counsel for the administrators argued that by the end of the transaction, the properties (minus that at 278 Glasgow Road, Rutherglen) were in the possession of the defenders, without any consideration having been paid for these.

On this basis, the court (both at the first hearing and at the appeal), held that a gratuitous alienation had taken place and that in the absence of adequate consideration, the dispositions were reduced.

Please see below for a link to the full report transcript:

Although it is rare for challenges of this nature to ever make it as far as court (mainly due to time and cost constraints in the running of an insolvency), IPs should take comfort from the court’s reading of this case. It shows that the court will not take, what can often be, spurious explanations at face value – if the explanation truly does not seem plausible, courts are prepared to look behind this to establish the real position. Whilst not every IP will have the time and resources to raise such an action, the decision shows that it can be worthwhile (in certain circumstances) looking beyond the first explanation provided.