Supreme Court overturns liquidator's challenge to pre-liquidation security granted over golf club

Joanne Gillies was commenting as the Supreme Court reinstated the decision of the Outer House of the Court of Session in Scotland in favour of Foxworth Investments Ltd, which had been granted a standard security over the Letham Grange hotel and golf course by its new owners as the previous owners went into liquidation. The Supreme Court reversed the decision of appeal court the Extra Division , which had found that the Outer House was "obviously wrong" to conclude that the hotel had not been sold at significant undervalue, removing it from the insolvent company's assets.

"The Supreme Court's decision will come as a particular blow to liquidators seeking to challenge pre-liquidation transfers for the benefit of creditors - especially where there is, as is often the case, a trail of inadequate or unsatisfactory documentation," she said. "For litigants more generally, the message could not be clearer – ensure you succeed at first instance as chances on appeal are getting markedly slimmer."

The outcome of the court proceedings hinged on whether the sale of a hotel and adjoining golf course by Letham Grange Development Company Ltd (LGDC) shortly before it was placed in liquidationwas what is known in Scots law as a 'gratuitous alienation', meaning a property transaction conducted for significantly less than market value. Under the 1986 Insolvency Act, a liquidator may challenge any transfer of property by a company within two years of its winding up and that transfer will be set aside unless it was made for "adequate consideration". However, any rights granted over the property to a third party "in good faith and for value" will be preserved.

LGDC purchased the property in November 1994 for just over £2 million. It sold it on to Nova Scotia Ltd (NSL) for £248,100 in February 2001. When LGDC went into liquidation in December 2002, the value of the property was estimated at about £1.8 million.

In January 2003, NSL granted a standard security over the property in favour of Foxworth. This effectively gave Foxworth the right to the property if NSL defaulted on its debts. Later that same year the liquidator of LGDC, Mr Henderson, began proceedings against NSL challenging the 2001 sale on the grounds that it was a gratuitous alienation. He obtained a decree by default in 2009 when NSL failed to appear in court. He then tried to challenge Foxworth's security on the grounds that Foxworth knew that LGDC was in liquidation when it obtained the security and so therefore could not claim that it had obtained it "in good faith and for value". All three companies shared a common director and 'directing mind', Mr Liu.

In the Outer House, Lord Glennie accepted NSL's argument that it had assumed debts of £1.85m owed by LGDC to Liu and his family along with the sale. This meant that there had been no gratuitous alienation. On appeal, the Extra Division overturned this decision because of the inadequate documentation surrounding the transactions. The court said that Lord Glennie had "erred in law" by accepting NSL's evidence on the point, and had failed to give satisfactory reasons for the conclusions he had reached on that evidence.

Lord Reed, giving the leading judgment in the Supreme Court, restored the decision of the Outer House and allowed Foxworth's appeal. He said that although the Extra Division was correct to say that an appeal court could interfere with a judge's decision if that judge was 'plainly wrong'; this criterion was not met in the present case. A judge was not necessarily "plainly wrong" if the appeal court would not have reached the same conclusion; rather, what mattered was whether the decision under appeal was one that "no reasonable judge could have reached", he said.

"It follows that, in the absence of some other identifiable error, such as ... a material error of law, or the making of a critical finding of fact which has no basis in the evidence, or a demonstrable misunderstanding of relevant evidence, or a demonstrable failure to consider relevant evidence, an appellate court will interfere with the findings of fact made by a trial judge only if it is satisfied that his decision cannot reasonably be explained or justified," he said.

"Given the best evidence that something is not correct or that a transaction is not quite as it is portrayed is often the poor paperwork surrounding or evidencing it, this decision will be a blow for the liquidators," said Joanne Gillies.