Just issued: interesting new case on gratuitous alienations

Blog by Gordon Hollerin, Partner in the Banking & Finance team

The administrators of Questway Limited had been appointed by its directors, after another company in its group with which it had cross guarantees had been put into administration by assignees of Anglo Irish Bank. The group owned around 120 properties and had borrowings of £20 million. Following their appointment the administrators discovered, that three months beforehand, Questway had transferred £90,000 to a director personally. On the same day there had been a number of other transactions. Mr Pelosi, who controlled the companies and was described by the judge as a shadow director, had withdrawn £9,000 from Questway’s account but had also transferred from his personal account into Questway’s account two payments of £45,000 and £53,500

The Questway administrators sued the director for repayment of the sum paid to him of £90,000, which they said was a gratuitous alienation challengeable under section 242 of the Insolvency Act

The director’s defence was that Mr Pelosi had transferred the sum into Questway’s account in error and that the overall effect of the transactions was that Mr Pelosi was repaying a series of 20 loans made in cash by the director to Mr Pelosi over a period of 14 months. The director said that no interest was due on the loans and there were no agreed repayment terms. He had no receipts but Mr Pelosi gave evidence supporting the director’s statements.

Lord Hodge did not accept the evidence of the director or of Mr Pelosi, which he found to be neither credible nor reliable. He said that when the money reached Questway’s account it was Questway’s property and so the transfer of £90,000 from that account to the director was a gratuitous alienation. He ordered the director to repay £90,000, plus interest, to the administrators

This case illustrates that, in appropriate circumstances the Courts, will strike down payments made to personal accounts from the account of a company which later goes into insolvency, even in the face of an alternative explanation from not only the recipient but also from the person who was the original source of the funds. As a side issue this case also shows the speed with which the Scottish Courts can deal with these cases with a period of only six months between commencement of the action and the decision being issued.

http://www.scotcourts.gov.uk/opinions/2012CSOH107.html

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