Inner House finds appointment of court-chosen liquidator did not frustrate division of £3.25m property sale proceeds

Inner House finds appointment of court-chosen liquidator did not frustrate division of £3.25m property sale proceeds

The shareholders of a liquidated company that owned a £3.25 million property in Edinburgh have succeeded in a reclaiming motion challenging a Lord Ordinary’s decision to refuse to grant them decree for payment of their shares of the sale proceeds.

Colonnade Properties Ltd and other trustees of the Newbattle Pension Fund argued that the commercial judge was wrong to hold that the clause obliging the respondents to distribute the proceeds was contingent upon another clause being purified. The liquidators of Beechmount Ltd argued that the company’s obligation to pay under agreement had never crystallised and was frustrated by the appointment of a liquidator.

The appeal was heard by the Lord President, Lord Carloway, together with Lord Woolman and Lady Wise. MacColl KC appeared for the pursuers and reclaimers and Ower, advocate, for the respondents.

Court appointment

The respondent company was incorporated in March 1996, with its only significant asset being Beechmount House, an Italianate-style villa located on Corstorphine Hill in Edinburgh. Relations between the two directors broke down resulting in two litigations, which were settled in October 2018 by an agreement designed to regulate the sale of Beechmount House and the liquidation of the respondent.

It was believed by the parties that there was a potential tax liability in respect of certain periods where one of the directors and/or their families had stayed in the properties which might be viewed as a benefit in kind. It was therefore agreed under clause 3 of the contract that the parties would appoint an independent expert to represent their interests in discussions with HMRC, with payment of the proceeds of sale to happen further to the resolution of those matters per clause 5.

In November 2019, one of the directors petitioned the court for a winding-up order, which was not opposed by the petitioners. On 17 December 2019 the court ordered a winding-up and appointed an interim liquidator, who was later appointed liquidator on 31 January 2020. By February 2020 she had received the vast majority of the sale proceeds, but refused to distribute it, saying she was following “robust” legal advice that the agreement was not binding upon her.

The commercial judge reasoned that the contract had been frustrated, as the ability of the parties to perform the obligations in clause 3 had been frustrated by the court appointment of a liquidator. As a result, the obligation to distribute the sale proceeds in terms of clause 5 had never crystallised. It was submitted for the pursuers that the commercial judge had erred in holding that clause 3 had not been purified prior to liquidation.

No supervening event

Delivering the opinion of the court, Lord Carloway observed: “Liquidation does not, without express provision, terminate or invalidate a contract. Should it occur, a liquidator has a choice. She can adopt the contract, in which case she must perform the obligations contained within it. Alternatively, she can repudiate the contract, in which case, and depending on the value of the assets, the company will require to pay damages for the breach. In either event the contract remains ‘binding’ on the company.”

He continued: “The consequence of the liquidator’s decision must be that the contract is repudiated. That results in a liability to pay damages; being prima facie the sum of £800,000 specified as due, but which had not been paid, under clause 5. The obligations under clause 3 have been rendered redundant, in so far as Beechmount are concerned. The liquidator determined that no approach to HMRC is required; any tax liability resting solely on the individuals concerned. She intends to distribute the net assets once this litigation is resolved.”

Assessing whether the agreement had been frustrated, Lord Carloway said: “The appointment of the liquidator did not frustrate the agreement. Frustration is a rare creature in the world of contract. It requires there to be a supervening event, which was not foreseen or provided for by the parties at the time of the contract. The agreement here expressly contemplated the appointment of a liquidator, albeit in the context a voluntary, rather than a compulsory, winding up.”

He concluded: “Performance of the obligations was not rendered impossible by the liquidator’s appointment; it remained open to the liquidator to adopt the agreement and to perform accordingly. There was no radical change in the obligations under the agreement.”

The reclaiming motion was therefore allowed, and the commercial judge’s interlocutor recalled.

Share icon
Share this article: