Adequate Consideration Of Gratuitous Alienation

Author:Mr Alan Meek

Gratuitous alienation is one of the most familiar parts of our law and yet relatively rarely seems to come to court. That may be because the law is so well understood that there is little left to debate and so, although disputes frequently arise, the outcome is often so predictable that out of court settlements are common.

The case of The Liquidators of Grampian MacLennan's Distribution Services Limited v Carnbroe Estates Limited [2017] CSOH8 is however one that made it to the Outer House.

It did so on the question of the meaning of "adequate consideration" in section 242 of the Insolvency Act 1986.

Put very briefly the disposal of an asset cannot be challenged successfully as a gratuitous alienation if adequate consideration has been paid. The difficulty of course comes in deciding what constitutes "adequate consideration".

In Grampian, four or five months before the commencement of liquidation, a company sold property for £550,000. The liquidator challenged that transaction as a gratuitous alienation alleging that the price was not adequate consideration for the purposes of section 242.

Lord Woolman was called upon to determine whether the price of £550,000 for the sale in July 2014 constituted adequate consideration having regard to the following facts:-

the property had originally been purchased in 2005 for £630,000; previous valuations (in 2009 and 2013) suggested values of £1.2m - £1.3m (open market valuation) or £800,000 (if only limited marketing were undertaken); a bank holding a standard security and floating charge securing £550,000; the bank giving very strong signals that it intended to take enforcement action against the borrower. Lord Woolman decided in the circumstances that the consideration was...

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