MacDonald & Anor v Carnbroe Estates Ltd (Scotland) [2019] UKSC 57 (4 December 2019)
Citation:MacDonald & Anor v Carnbroe Estates Ltd (Scotland) [2019] UKSC 57 (4 December 2019)
Rule of thumb:What is the minimum amount that a property can be sold for in order to constitute ‘adequate consideration’? The Court in this case considered when ‘adequate consideration’ was not met for the sale of a property – it affirmed that for the first 6 months the property is on the market, less than 75% of the minimum value set by the surveyor cannot be accepted or else that is not adequate consideration.
Background facts:
A company owned by Mr Quinn was in financial difficulty. It owned property and it sought to sell this property to raise capital and keep the business going. The property in question had earlier been valued at £1.4 million some years earlier, but due to a lack of capital invested to keep it in good condition it started dropping in valuation. A new valuation from a surveyor of between £720,000 and £840,000 was provided. Before the expiry of a 6 month period, £550,000 was paid for it by Carnbroe, in which Mr Gaffney was a director. 550k/720k was 75% of the lower value, and not 75% of the mid-value of £780k.
Parties argued:
Mr Quinn’s company subsequently went into insolvency and the liquidator sought to claw back this transaction as being invalid due to being undervalue. After a complex myriad of arguments, with Quinn basically arguing that due to the lack of finance the value was plummeting and he thought this was a good offer in all the circumstances.
Judgment:
The Court finally held that it was not adequate consideration. If the property had been marketed for 6 months with no buyers, then 75% of the lower value would have been a valid price, but until then, the lowest that could have been accepted was 75% of the mid-value. The Court also affirmed that there are further rules for if a property is sold to an associate, but this did not apply in this case - Mr Gaffney and Mr Quinn in this case had known each other for 30 years and had entered business transactions using each other’s services, but the Court firstly held that this was not sufficient to be known as ‘associates’ of actual shared business ventures which affects gratuitous alienation transactions – this was still deemed to meet the ‘good faith’ and ‘arms length’ transaction.
Ratio-decidendi:
‘6. Mr Quinn entered into discussions to sell the Property with James Gaffney (“Mr Gaffney”) who was a successful businessman whom he had known for over 30 years and with whom he had had business dealings throughout that time.... not “associates” in terms of the relevant legislative definition, but their long business relationship justified close scrutiny of the transaction... What the statute requires is the striking of a just balance between the creditors’ interests and the interests of those contracting at arm’s length with an insolvent company. The test of “adequate consideration” takes account of both interests. He refers by way of analogy to statutory provisions in English law (section 238 of the 1986 Act) and in Australian law (sections 588FB, 588FC and 588FF of the Corporations Act 2001) and submits that the test is whether the transaction was a commercial one which was satisfactory in all the circumstances rather than, as the First Division held, a strict approach to the words “adequate consideration”. Thirdly, he submits that the First Division’s judgment lacks commercial practicability: a purchaser in a commercial deal looks after its own interests and is entitled to exploit a vendor’s financial distress to obtain a favourable price in an arm’s length transaction. Sales at less than open market value are the norm where there are problems with liquidity. But the purchaser cannot know whether the vendor in pursuing an urgent sale has a realistic possibility of preserving its business or is otherwise acting in the interests of its creditors. If the First Division’s analysis were correct, prudence would require the purchaser to refuse to deal with a company in distress and instead wait to see if a formal insolvency eventuated which would enable it safely to purchase from a liquidator...’, Lord Hodge at 6 and 69
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.