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  4. Liquidation did not frustrate contract: Inner House

Liquidation did not frustrate contract: Inner House

21st February 2023 | insolvency , corporate , dispute resolution

Liquidation of a company does not terminate or invalidate its contracts without express provision: the liquidator can adopt or repudiate a contract, but it remains binding on the company, which in the latter case will be liable in damages for the breach.

The First Division of the Court of Session gave the ruling in allowing a reclaiming motion by Colonnade Properties Ltd and two individuals, who sued Beechmount Ltd (in liquidation) for sums due in terms of a settlement agreement dealing with the sale of a property in Edinburgh.

The agreement followed a mediation to resolve a dispute between the two directors of Beechmount. It also dealt, in clause 3, with potential tax issues arising from the use of the property, with provision for the appointment of an independent expert to represent Beechmount in discussions with HMRC. Parties disagreed about whether clause 3 had been obtempered, as no formal appointment had been made of the expert chosen. 

Clause 5 dealt with distribution of proceeds and further provided that Beechmount was to be “promptly” put into members’ voluntary liquidation. Payments due in terms of the agreement were not made, and one director petitioned, unopposed, for winding up. The liquidator refused to make payments under the agreement to the other director, acting on advice that the agreement was “not binding upon her”.

The commercial judge refused decree, reasoning that there had been no appointment in terms of clause 3, that compulsory liquidation removed the ability of the directors to appoint an expert, which frustrated the contract, and that in that event the obligation to distribute the proceeds had never crystallised.

Giving the opinion of the Inner House, Lord President Carloway, who sat with Lord Woolman and Lady Wise, said that the focus at proof on to what extent parties had complied with clause 3 might have deflected parties’ attention from the more important legal aspects of the case. 

“Liquidation does not, without express provision, terminate or invalidate a contract”, he continued. “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.”

The purpose of the agreement was to resolve the parties’ disputes, regulating the sale of the property, distribution of proceeds and then liquidation. In addition, it encouraged co-operation in relation to the settlement of potential tax issues. “A contract should be interpreted in a manner which gives effect to its terms. There is little difficulty in doing so in this case.”

Clause 5 was the key provision; clause 3 was ”merely aspirational”. “Although it is anticipated that performance of clause 5 will follow these steps being taken, it is not dependent upon clause 3 being obtempered… The interposition of a liquidator in a compulsory winding up does not remove the core obligation on Beechmount as a party to the contract. It does not terminate that obligation.”

The liquidator having chosen in effect to repudiate the contract, was liable to pay damages, “being prima facie the sum of £800,000 specified as due, but which had not been paid, under clause 5”.

Lord Carloway further observed that the liquidator’s appointment 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. That difference is immaterial.” Performance had not been rendered impossible by the liquidator’s appointment;  there was no radical change in the obligations under the agreement.

The reclaiming motion would be allowed and decree granted.

Read the opinion here.

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