Settlement agreements and the application of the Insolvency Act 1986

Settlement agreements and the application of the Insolvency Act 1986

A recent High Court decision can potentially profoundly affect the actions of liquidators in their dealings with former directors and/or employees once a winding-up petition has been presented and before a winding-up order is made. John Churchill, barrister at Guildhall Chambers, examines this decision and says it reaffirms section 127 of the Insolvency Act 1986 (IA 1986) as a powerful tool to protect assets for creditors.

Original news

Officeserve Technologies Ltd (in compulsory liquidation) and another v CAM [2017] EWHC 1920 (Ch), [2017] All ER (D) 37 (Aug)

The settlement agreement entered into by the first applicant company and the respondent, governing certain claims or potential claims by each against the other, did not release the respondent from his obligations to the company in his capacity as a director. The Chancery Division held that the agreement released the respondent from claims connected with or arising out of his employment and not connected with or arising out of his holding an office.

What was the background to the case?

HHJ Matthews gave judgment on preliminary issues in an application that the respondent founder and former shareholder (the respondent) of the applicant company (the company, subsequently in liquidation) had misapplied monies belonging to the company.

Following the presentation of the winding-up petition against the company (but before the winding-up order was made), the respondent and the company concluded a settlement agreement. By this ‘settlement agreement’ the company agreed it would waive any claims against the respondent. On the part of the respondent, his shares in the company, other benefits, and rights including all ‘employment claims’ were given as ‘consideration’ to the company (to facilitate an agreement with one of the company’s largest creditors). The legal effect of this settlement agreement, which was concluded as a deed of release was the question which the court had to consider (as the ‘agreement’ was concluded as a deed the term ‘consideration’ above is used as a label of convenience rather than denoting the

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