Settlement agreement frustrated by liquidation

Published on
2 min read

An issue contracting parties may face at some point is the impact of the insolvency of their counterparty. In the main, the relevant considerations normally will be whether or not to terminate (subject to the restrictions in the Insolvency Act 1986), persuade the office holder to cause the company to perform, prove in the insolvency for damages for non-performance and/or explore if there is some possible proprietary claim.

Colonnade Properties v Beechmount is an interesting Scottish Case where the Court of Session concluded that the compulsory liquidation of a party (in this case Beechmount) had, on its specific facts, frustrated the contract.  This appears to be the first reported example of that conclusion being reached. Frustration releases both parties from their obligations, but it is doctrine applied narrowly under English Law - a contract is frustrated where there is some event that arises out of the parties' control, which renders performance of the contract impossible or radically different from what they had intended. Many contracts provide for insolvency as a termination event so frustration is rarely relevant.

This particular case involved a settlement agreement relating to two unfair prejudice petitions and it provided for a tax expert to be appointed on behalf of Beechmount and for a property to be sold with the proceeds of that distributed via an MVL. The subsequent winding up order, however, resulted in the directors ceasing to have authority to appoint the expert, which was key to the subsequent distribution, and so the contract became impossible to perform.

It has generally been understood that the insolvency of a counterparty is unlikely to fit the criteria for frustration and that remains the case. Nevertheless, as this decision has shown, it is possible on the right facts.

Colonnade Properties Limited v Beechmount Limited (in liquidation) [2022] CSOH 29

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