Mon 27 Jan 2020

Curing a gratuitous alienation - can repayment at a later date amount to "adequate consideration"

Hot on the heels of the Supreme Court's decision in Macdonald v Carnbroe Estates, we have another judgment about adequate consideration in gratuitous alienations.

While Carnbroe focussed on what would amount to "adequate", the First Division decision in Quinn v Brennan [2020] CSIH 3 focusses on the timing and reciprocity of the consideration.

The background to the case is as follows.  John O'Boyle in August 2014 transferred a sum of just over £190,000 to a bank account to enable his partner, Karren Brennan to purchase a residential property in East Kilbride in her own name.   Mr O'Boyle was then sequestrated on his own application in February 2015 and Yvonne Quinn appointed as his trustee in sequestration.  He was discharged from sequestration in May 2016.  In January 2017, Ms Brennan sold the property in East Kilbride and paid a sum of just over £197,000 directly to Mr O'Boyle.  Mr O'Boyle's trustee later raised an action in the Court of Session for declarator that the payment from Mr O'Boyle to Ms Brennan in August 2014 was a gratuitous alienation in terms of section 34 of the Bankruptcy (Scotland) Act 1985 and for an order requiring Ms Brennan to make payment of the sum of £190,000 to Mr O'Boyle's trustee.  Ms Brennan defended the action arguing that her payment of £197,000 to Mr O'Boyle in 2017 constituted adequate consideration for the alienation.

The First Division disagreed with Ms Brennan.  The court emphasized that there needs to be an element of exchange or reciprocity for a payment to amount to consideration for an alienation.  The consideration must be given quid pro quo for the alienation.  Furthermore, the exchange or reciprocity needs to be determined at the time the alienation is made and the consideration agreed.  The transfer of the £190,000 from Mr O'Boyle to Ms Brennan in 2014 to enable the purchase of the house had no reciprocal obligation on Ms Brennan at that time.  The repayment in 2017 could not retrospectively change the lack of a reciprocal obligation in 2014.  No adequate consideration was therefore made for the transfer of funds in 2014.  The repayment in 2017 did not in and of itself cure the gratuitous alienation.

Unsurprisingly, the First Division highlighted that the allow a later repayment to retrospectively cure a gratuitous alienation would enable debtors to easily circumvent the provisions about gratuitous alienations in insolvency legislation.  Funds could easily be transferred out of the debtors estate and returned to the debtor following discharge without the trustee in sequestration having any remedy to enable the funds to go towards payment to the debtor's creditors.

Make an Enquiry

From our offices we serve the whole of Scotland, as well as clients around the world with interests in Scotland. Please complete the form below, and a member of our team will be in touch shortly.

Morton Fraser MacRoberts LLP will use the information you provide to contact you about your inquiry. The information is confidential. For more information on our privacy practices please see our Privacy Notice