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Alan Alexander Brown and John Bruce Cartwright, Joint Administrators of Questway Limited, Oceancrown Limited and Loanwell Limited -v- Stonegale Limited and Norman Ralph Pelosi

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Alan Alexander Brown and John Bruce Cartwright, Joint Administrators of Questway Limited, Oceancrown Limited and Loanwell Limited -v- Stonegale Limited and Norman Ralph Pelosi

20 February 2015

On 13 February 2015, the Inner House issued its decision in reclaiming motions at the instance of the defenders in three related actions, following the decision of Lord Malcolm after proof in the commercial court.

The joint administrators of related companies sought reduction of the transf er of title to three commercial properties, and payment of £125,000 as the proceeds of sale of one residential property, on the basis that the transfer of those properties to the defenders constituted gratuitous alienations, in terms of Section 242(4)(b) of the Insolvency Act 1986 (respectively, “Section 242” and “the 1986 Act”).

Section 242(1) provides that, where a company enters administration, an alienation of its property made on a relevant date is challengeable by the administrator. Section 242(4)(b) provides that the court shall grant decree of reduction, or an order for such restoration of property to the company as may be appropriate, unless the person seeking to uphold the alienation establishes that the alienation was made for adequate consideration.

The three companies in administration were part of a group of companies controlled by Ralph Norman Pelosi Senior (“Mr Pelosi Senior”). His son, Norman Ralph Pelosi (“Mr Pelosi Junior”) was the sole shareholder and sole director of Stonegale Limited. A loan facility in the region of £17.3million had been made available to Oceancrown by Anglo Irish Bank (“AIB”). That debt was subsequently assigned by AIB to Hardrian Sarl. The deb had been cross-guaranteed by other companies in the group.

The group was involved in the development and letting of commercial and residential properties. It was controlled by Mr Pelosi Senior. Oceancrown owned a property at 278 Glasgow Road. Prior to 10 November 2010, Mr Pelosi Senior concluded an agreement to sell that property to Clyde Gateway Development Limited (“CGDL”) for £2.4million. On 10 November 2010, Oceancrown disponed 278 Glasgow Road to Strathcroft Limited, which was 99% owned by Mr Pelosi Senior, for a consideration recorded as being £762,000. On the same date, Strathcroft disponed that property to CGDL, for £2.1million plus VAT of £367,500. Strathcroft had, in effect, been interposed into the sale of the property by Oceancrown to CGDL. By virtue of that interposition, Strathcroft made an immediate “profit” of £1.7million, or thereby.
The sale of 278 Glasgow Road was part of a wider series of transactions, which involved the transfer of a further four properties at 110, 210 and 260 Glasgow Road, and 64 Roslea Drive. Those four transfers were the subject of the actions. Following the sale of 278 Glasgow Road, the sum of £2.4million was remitted to AIB, in exchange for the release of standard securities held by it over the four properties. AIB was told, by solicitors acting on behalf of all of the companies involved in the transactions, that the £2.4million comprised the free proceeds of the sale of the four properties at 110, 210, 260 Glasgow Road, 64 Roslea Drive, and the sale of 278 Glasgow Road.

There was no dispute between the parties that the whole funds remitted to AIB came from the monies paid by CGDL in respect of its purchase of 278 Glasgow Road. At proof, the defenders led evidence of an alleged loan by Strathcroft to Oceancrown and Loanwell. £1.584million of the “profit” achieved by Strathcroft on the sale of 278 Glasgow Road to CGDL was said to have been loaned to Oceancrown and Loanwell, to facilitate the purchase by them of three of the four properties which were the subject of the action. The fourth was transferred to Mr Pelosi Junior.  A document bearing to be a loan agreement was produced. After hearing evidence at proof, the Lord Ordinary concluded that the loan agreement was a sham. No consideration whatsoever had been paid in respect of the transfers of property which were challenged. He granted decree of reduction in respect of three dispositions, and ordered payment of the sum of £125,000 in respect of the transfer of 64 Roslea Drive. 

The defenders and reclaimers took no issue with the Lord Ordinary’s findings in fact, but submitted that he had erred in finding that no consideration had been paid in respect of the alienations under challenge. They submitted that in November 2010, the sum of £2.4million remitted to AIB by Strathcroft constituted consideration for the four properties. The payment made to AIB reduced the indebtedness of the companies in administration, which consideration was “adequate”. There was a “nexus” between the payment of the consideration and the alienations which followed.

In the Opinion of an Extra Division of the Inner House, delivered by Lord Brodie, the court noted that, faced with the difficulty that the defence as pled had failed evidentially, senior counsel for the defenders presented an alternative basis upon which he said that adequate consideration had been provided in respect of the alienation of the properties. That alternative basis was the payment of £2.4million to AIB. The reduction in the group borrowings was the “consideration”. The court held that it could not give effect to that submission. There was force in the respondents’ submission that, if the defenders did not think that consideration was being given at the date of the transfer, why should the court think so? Senior counsel’s alternative basis upon which he sought to argue that adequate consideration had been paid is:

“an artificial construct. It bears no more relation to reality than the defenders’ averments about sales. It does not reflect the intention of the controlling mind of the companies which made the alienations (Mr Pelosi Senior) or the controlling mind of the company and individual (Mr Pelosi Junior) who received the alienation. Matters become even clearer when one disregards the device of interposing Strathcroft between Oceancrown and Clyde Gateway in respect of the transfer of 278 Glasgow Road. Clyde Gateway paid £2.4million for the transfer of 278 Glasgow Road from Oceancrown. That sum was received by AIB in reduction of Oceancrown’s indebtedness. What followed were what the Lord Ordinary was fully entitled to describe as ‘gratuitous sales’ of the other four properties. Looking at matters from the perspective of the companies which alienated the properties, as [senior counsel for the reclaimers] encouraged the court to do, what did they receive? It is difficult to agree with the Lord Ordinary’s answer to that question: nothing at all”.

The whole motivation for the transaction was the diversion of assets away from the group’s creditors. That is exactly what Section 242 was designed to prevent. The transfer of the four properties were devices for the diversion of assets from creditors, facilitated by a misrepresentation to the banker of the companies which it involved.

The reclaiming motions were refused.

The joint administrators were represented at proof by Susan Ower, and at the reclaiming motion by Richard Keen QC and Susan Ower.