Adila Malik, from our insolvency team, reviews the Court of Appeal decision in Doherty v Fannigan Holdings Ltd [2018] EWCA Civ 1615 which considered whether a payment obligation in a share purchase agreement gave rise to a claim for a liquidated sum.
The share purchase agreement provided for the transfer of shares to be in tranches, with the payment for each tranche to be made prior to the share transfer. The Appellant was in breach of his obligation under the share purchase agreement to pay £2m to the Respondent on 1 July 2015 as the price for the transfer to him for a tranche of shares. The Respondent did not transfer the shares and subsequently served a statutory demand on the Appellant. The Registrar held that the failure to pay did not result in a liability for a liquidated sum as the Respondent retained the legal and beneficial ownership of the shares. The Respondent was therefore not entitled to serve a statutory demand.
Upon the Respondent’s appeal, the Deputy Judge took a different view as to the construction of the agreement. In his view “the payment must come first and if it does not occur, there is no obligation … to transfer the shares. The payment is the trigger for the obligation to transfer but the obligation to pay the tranches is not an optional obligation, it is an absolute one.” The Deputy Judge held that the amount unpaid did amount to a debt for a liquidated sum. He, therefore, allowed the appeal and permitted the Respondent to present a bankruptcy petition.
On further appeal to the Court of Appeal, the leading authorities on the distinction between dependent and independent contractual performances were reviewed by Sir Colin Rimer. He decided that the terms of the contract meant that the parties’ respective obligations were dependent upon each other and that neither party was entitled to enforce the performance of the other except against a performance of his/its own. Whilst the Appellant breached the contract by failing to make the £2m payment of the price, he did not become a debtor for the price. The Respondent could, therefore, sue the Appellant for specific performance or damages for breach of contract but could not pursue a claim for non-payment of £2m in bankruptcy proceedings.
This case emphasises the importance of establishing a liquidated debt before issuing statutory demands based upon contractual breaches.
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