Payments made to an insolvent debtor could not count as consideration for an earlier alienation by the debtor unless they were part of the agreement surrounding the original transfer; and payments to a discharged bankrupt were not capable, as a matter of law, of amounting to consideration for an alienation made prior to sequestration, the Inner House has ruled.

Lord President Carloway, Lord Brodie and Lord Drummond Young gave the decision in refusing a reclaiming motion (appeal) by Karen Brennan against the Lord Ordinary's decision to grant decree for payment in an action by Yvonne Quinn as trustee in the sequestrated estate of John O'Boyle.

Mr O'Boyle was sequestrated in February 2015 and discharged in May 2016. The action concerned payments of £190,960 and £67,837 said to have been made by him to the defender in August and September 2014. Proof was agreed regarding the defender's averments concerning the second payment, but the Lord Ordinary held irrelevant the defender's averments that while the first payment was used to acquire a house, title to which was taken in her name, the house had been sold in January 2017 and £197,462 paid to Mr O'Boyle at that time, and that this constituted adequate consideration for the alienation.

On appeal the defender argued that the Lord Ordinary was in error in holding that the defender "has to show that at the time of the alienation something of more or less equivalent value was obtained in exchange for it". If that was so, consideration could never come after the time of the alienation. The words "the alienation was made for adequate consideration" in s 34(4)(b) of the Bankruptcy (Scotland) Act 1985 meant that there must be a nexus between the alienation and the consideration, but said nothing as to what the requirements for that nexus were, and subsequent repayment could constitute such a nexus.

Lord Drummond Young, delivering the opinion of the court, said that if a payment was to amount to "consideration" for an alienation, it had to be the counterpart of that alienation. "This means that there must be a fundamental element of exchange or reciprocity between the payment and the alienation; the payment must be regarded on objective grounds as a quid pro quo for the alienation. That is the fundamental meaning of the word 'consideration'."

Following Macfadyen's Trustee v Macfadyen (1994), he added that "whether the necessary element of reciprocity exists must be determined on strictly objective grounds"; and that "the existence or otherwise of the necessary element of reciprocity must be determined at the time when the exchange is agreed... something given cannot later be converted into consideration merely because the giver and receiver choose so to describe it".

 

The necessary reciprocity was "entirely lacking" in this case, and it was impossible to hold that the payment  in January 2017 was "consideration" for the earlier transfer of funds and acquisition of property. Were it otherwise, "the object of s 34 of the Bankruptcy (Scotland) Act 1985 could be circumvented with impunity".

However there was a perhaps even more fundamental reason for rejecting the defender's arguments. "In our opinion the payment of funds to a discharged bankrupt is not capable, as a matter of law, of amounting to consideration for an alienation made by the bankrupt prior to his sequestration. This conclusion follows from the effect of sequestration on the insolvent’s estate." 

When the bankrupt's estate vested in the trustee, the estate formed "a distinct patrimony" from the debtor's own property; this explained why the trust estate was not liable for the trustee's own private debts, but it followed also, that "First, the trust estate must be applied for the trust purposes and cannot be used, in the absence of express authority in the trust purposes, to satisfy the debts of the truster as an individual, that is to say, debts incurred independently of the trust patrimony. Secondly, a payment made to the truster will not be a payment to the trust, as it involves a payment to a distinct patrimony."

Estate acquired by the debtor following discharge formed a distinct patrimony, and "Following the discharge of the debtor from the sequestration,... he is able to acquire further property, and in so far as he does so that property forms a distinct patrimony from the property that he held prior to sequestration which was transferred to the trustee."

Lord Drummond Young concluded: "If a payment is to be consideration, it must respect the double patrimonies. If it does not, it cannot amount to a valid payment of consideration. That is an elementary principle of trust law, and in our opinion it is fatal to the defender’s argument in the present case."

Click here to view the opinion of the court.