Bankruptcy petitions—independent and unqualified obligations (Mulville v Sandelson)

Bankruptcy petitions—independent and unqualified obligations (Mulville v Sandelson)  

A settlement deed provided for the payment by Mr Sandelson of £1.25m to Ms Mulville as a settlement sum. Several obligations would have arisen upon receipt of the settlement sum, but it was never paid. Ms Mulville therefore presented a bankruptcy petition against Mr Sandelson. The question for the court was whether the obligation to pay the settlement sum was independent and unqualified—if not, it could not form the basis of the petition. Roth J held that it was an independent obligation: payment of the settlement sum was a discrete obligation which had to be fulfilled first, and within 21 days of the agreement. The case demonstrates the importance of careful drafting—it should be made clear that an obligation to pay is conditional, or else non-payment can give rise to insolvency proceedings. Written by Karl Anderson, barrister, at 4 Stone Buildings.

Mulville v Sandelson [2019] EWHC 3287 (Ch)

What are the practical implications of this case?

There are two points of general significance in this judgment.

First, those drafting settlement agreements, or advising clients in relation to terms of settlement, should have in mind the implications of including an independent, unqualified obligation to pay a settlement sum. If the obligation to pay settlement monies is not dependent or conditional on the performance of some other obligation, then (as this decision demonstrates) a debt claim can be brought to recover the settlement monies as a liquidated sum. This in turn entitles the receiving party to present a bankruptcy or winding-up petition against the paying party if the settlement monies are not paid in accordance with the terms of the settlement. A term which provides for the payment of a sum in settlement before further obligations arise is likely to be construed as independent and unqualified, thereby giving the receiving party the option of instigating insolvency proceedings. In order to help avoid this possibility, legal representatives might consider including express conditions to the payment of settlement monies (although, of course, fulfilment of those conditions by the receiving party will then give rise to an obligation to pay the settlement as a liquidated sum).

Second, and more generally, this case illustrates that matters in litigation do not simply end once a settlement agreement has been signed and executed. Settlement agreements are, like any other contract, capable of being breached. Thought should be given at the time of drafting to methods of enforcement if the terms of the agreement are not complied with. If advising a paying party, the obligation to pay must be drafted realistically and agreed on that basis. Failure to comply with it may lead to the instigation of insolvency proceedings against the paying party, with attendant consequences such as (in the case of corporate clients) the freezing of the client’s bank accounts from the date the petition is advertised. Those advising a receiving party which has not received the promised settlement monies should consider whether a bankruptcy or winding-up petition will be the best method of recovering the debt.

What was the background?

The background to this dispute was set out in the recitals to the settlement deed. Ms Mulville and Mr Sandelson had entered into a joint venture in which they collaborated in the development of a luxury care home business. Both agreed that they would have equal stakes in the venture. A dispute arose in which Ms Mulville alleged that she had not received the equal treatment to which she was entitled. The parties agreed to settle the dispute without admission of fault and drew up the settlement deed to reflect this.

The key provision of the settlement deed was clause 2.1, which provided that Mr Sandelson would pay to Ms Mulville ‘the sum of £1,250,000 (the settlement sum) by no later than 31 January 2019 (without any set-off, deduction, counterclaim, reduction or diminution of any kind or nature)’. The settlement deed also provided that three obligations would arise ‘subject to’ the settlement sum being paid. For example, Mr Sandelson’s release was to be obtained subject to Ms Mulville’s receipt of the entire settlement sum (clause 4.1.1)—she was to transfer her shares in the joint venture companies after ‘having received the entire settlement sum’ (clause 6.3)—and her obligation to assign to Mr Sandelson her rights to recover money she had loaned to two of the companies which formed part of the joint venture were subject to receiving the settlement sum (clause 6.6.2). Further, Ms Mulville was to resign as a director of the joint venture companies within five business days of receipt of the entire settlement sum (clause 6.1).

What did the court decide?

Counsel for Mr Sandelson argued that the obligation to pay the settlement sum was not independent and unqualified. Rather, it was submitted that that obligation was dependent on Ms Mulville’s obligations to release Mr Sandelson, resign as a director, transfer her shares and assign her rights to recover the sums she had loaned. The order in which these obligations were to be performed was, it was said, irrelevant: what mattered was that the £1.25m was being paid in return for Ms Mulville to take various steps to extricate herself from the joint venture. It would have been unprincipled for Ms Mulville to be entitled to sue for payment of the £1.25m while her obligations remained unperformed.

Roth J rejected these arguments. Applying the general principles of construction set out by Lord Neuberger in Arnold v Britton [2015] UKSC 36, he held that the express wording of Clause 2.1 was clear. Payment was to be made without any set-off or deductions—something which did not suggest an intention to create a conditional obligation. Further, the timing of the payment was significant: Mr Sandelson was to pay the settlement sum before Ms Mulville’s obligations arose. It was to be expected that if Ms Mulville was not paid in full, she should be entitled to retain her involvement in the joint venture. On that basis, Ms Mulville was entitled to present a bankruptcy petition, and Mr Sandelson’s appeal was dismissed.

Case details

  • Court: High Court, Chancery Division  
  • Judge: Roth J  
  • Date of judgment: 4 December 2019

Karl Anderson is a barrister at 4 Stone Buildings. If you have any questions about membership of LexisPSL’s Case Analysis Expert Panels, please contact caseanalysis@lexisnexis.co.uk.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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About the author:

Zahra started working as a paralegal at Lexis Nexis in Banking and Insolvency teams in April 2019. Zahra graduated with a 2.1 honours in a BA French and Spanish, completed the GDL at BPP University and is seeking some experience before commencing the LPC. She has undertaken voluntary work for law firms in London, Argentina and Colombia.