Outer House judge rules settlement agreement frustrated by court appointment of liquidator

Outer House judge rules settlement agreement frustrated by court appointment of liquidator

Lord Clark

A commercial judge has ruled that the compulsory liquidation of a party to a litigation settlement agreement caused frustration of the contract and removed any requirement to pay the other parties to the case proceeds from the sale of a property in Edinburgh.

Colonnade Properties Ltd and other trustees of the Newbattle Pension Fund had originally raised an action against the defender, Beechmount Ltd. Beechmount went into liquidation in December 2019, and argued that the liquidator was not bound by the terms of the settlement agreement.

The case was heard in the Outer House of the Court of Session by Lord Clark. McColl QC appeared for the pursuers and Ower, advocate, for the defender.

Common law

Following a breakdown in relations between the two directors of the defender in 2017, one of whom had set up the Newbattle Pension Fund, it became the subject of a petition brought by the pursuers under section 996 of the Companies Act 2006. This litigation, along with another petition brought by the defender against the pursuers, was revolved by an extra-judicial agreement dated 17 October 2018 under which the defender’s only significant asset, a property in Edinburgh, was to be sold.

The property, Beechmount House in Edinburgh, had previously housed each director of the defender and it was considered that HMRC may wish to have regard to potential benefits-in-kind that had been obtained for the purposes of the company’s National Insurance contributions. The parties therefore agreed to appoint an independent expert to act on behalf of the company in dealings with HMRC.

It was further agreed that “further to the resolution” of the tax dispute, the net assets of Beechmount would be distributed. The property was sold on 5 April 2019. In December 2019, the court ordered the defender to be wound-up and appointed an interim liquidator. No formal instruction of an independent expert for the company ever took place.

It was submitted for the pursuers that the clause of the agreement obliging the defender to distribute the funds generated from the sale of the property remained binding upon the company, the matter of potential benefits-in-kind having been resolved and approved by the liquidator. There was, prior to the company entering liquidation, a purified obligation to deliver the initial tranche of funds under the relevant clause of the settlement agreement.

Counsel for the defender submitted that the settlement agreement did not bear to, nor could it, impose any obligations on a court-appointed liquidator, only on one appointed as part of a members’ voluntary liquidation. Alternatively, even if it could impose such obligations, the agreement was frustrated at common law due to the compulsory winding-up.

No crystallised obligation 

In his decision, Lord Clark said of the prerequisites for the distribution of the funds: “It is clear that [the agreement] did not merely require reasonable endeavours by the parties. That expression is used in the opening paragraph but the clause goes on to say that the parties shall appoint an independent expert on behalf of Beechmount Limited, nominated by agreement. As to whether an appointment was actually made, there is no doubt that the pursuers wished to instruct, and indeed instructed, Johnston Carmichael (JCCA) to act for the Company.”

He continued: “However, the fundamental problem when reading the terms of the emails in the context of all of the evidence is that formal instruction by the Company did not take place and there was no letter of engagement from JCCA.”

Examining the effect of this on enforcement of the agreement, Lord Clark added: “JCCA would, it seems, have agreed to be appointed, but, as it made clear to the parties, that could occur only if appointment was made by the Company. Absent such an appointment, JCCA did not proceed any further. Clause 3 was not implemented and hence there was, at the time of the compulsory liquidation, no crystallised obligation on the part of the Company to make the distributions stated in clause 5.”

He concluded: “As clause 3 had not been implemented or resolved by the time of the compulsory liquidation, the effect of the process was that the liquidator took control of the Company’s affairs and the directors ceased to have authority to bind the Company, including in appointing an independent expert. In the result, there was frustration of the agreement because this supervening event rendered performance of the outstanding elements of the contract impossible.”

For these reasons, the court pronounced decree of absolvitor in favour of the defender.

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