Should a Liquidator adopt or repudiate a contract upon appointment?

Introduction

In February 2023 the Inner House of the Court of Session allowed an appeal by the Shareholders of Beechmount Limited (in Liquidation) (“Beechmount”) regarding the distribution of funds held by the Liquidator of the company.

Background

Beechmount’s only significant asset – Beechmount House – was sold on 5 April 2019 for £3,250,000. The Shareholders and Directors had previously disagreed on how the sale proceeds ought to be divided. After court proceedings were raised, it was agreed through mediation that the proceeds should be distributed in terms of a Settlement Agreement. The Agreement aimed 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. Beechmount then went into Liquidation in December 2019 and an interim Liquidator was appointed. The Shareholders therefore raised proceedings against Beechmount. The Liquidator of Beechmount argued that as Beechmount’s obligation to pay under the agreement had not previously crystallised, the agreement was frustrated by the appointment of a liquidator; and the agreement was accordingly not binding. The commercial judge agreed with the Liquidator and refused to grant decree for payment to the Shareholders of the sum provided for in the Agreement.

Decision

The Shareholders appealed this decision and the appeal was allowed by the Inner House. In the Opinion of the Court, the Lord President held that, “Liquidation does not, without express provision, terminate or invalidate a contract”. The Court decided that, “a liquidator has a choice. [They] can adopt the contract, in which case [they] must perform the obligations contained within it. Alternatively, [they] 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.”

In this case, given that the liquidator had – in effect – chosen to repudiate the contract, Beechmount was held liable to pay damages, “being prima facie the sum of £800,000 specified as due, but which had not been paid.”

Comment

Officeholders should take care and take advice in relation to whether to refuse to perform or adopt contracts when a Company is placed into Liquidation. The Liquidator here (on the advice of counsel) understood that the Agreement was not binding on them, and that ultimately proved costly. By failing to adopt the contract, it was deemed to have been repudiated and resulted in a liability to pay damages. Performance had not been rendered impossible by the liquidator’s appointment. While in many cases the consequences of breach will be an unavoidable unsecured claim, the Court’s guidance is worth noting.

 

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb@bbmsolicitors.co.uk).This briefing note is current as at 27 February 2023 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).