Square Mile Partnership Ltd v Fitzmaurice McCall Ltd

A contractual obligation to repay, discharge or waive an inter-company debt does not necessarily extinguish the debt or alter the contractual measure of net assets. The court must construe the agreement and identify the legal effect of the relevant provision. A procedural order preventing recovery in particular litigation does not establish that the underlying debt is no longer due. Where the agreement uses audited accounts as the contractual yardstick, the accounts must be applied according to their stated contents unless the agreement requires a different adjustment. Equitable relief may be refused or made conditional where the claimant can be adequately compensated, including by an adjustment to the consideration payable.

The claimant and defendant were parties to a share sale agreement concerning RBF. A debt of £54,982 was owed by RBF to a group company associated with the claimant. The debt remained shown in RBF’s audited accounts at completion, although clause 4.3.1 required indebtedness to be repaid, discharged or waived.

In an earlier judgment, the court had treated the debt as no longer recoverable and ordered an adjustment increasing the defendant’s counterclaim. Before the order was drawn up, the judge recognised that this conclusion had proceeded on a mistaken understanding of the parties’ common ground and recalled the decision on that point. The issue was whether clause 4.3.1 made the debt unavailable for recovery or required the net assets to be treated as increased for the purposes of clause 6.

1. The claimant succeeded on the recalled issue. The debt was not to be treated as discharged, and no corresponding increase was to be made to the defendant’s counterclaim.
2. Snelling v Snelling [1973] QB 87 did not decide that the underlying debt was no longer due. The order dismissing the claim in that case gave effect to the rights of all parties who were before the court in the particular litigation. It did not establish a general rule that the debt itself had ceased to exist.
3. The contractual provisions were materially different. In Snelling v Snelling, the purpose of the agreement was to deprive the outgoing director of the benefit of his claim. Under clause 4.3.1, the creditor was entitled to procure that the debt was honoured, while retaining the option of waiving it. The clause required the selected step to be taken by completion; it did not itself convert the debt into a discharged debt.
4. The proposed equitable analysis did not assist the defendant. The claimant might have been able to seek relief against recovery, but it could not both prevent recovery and resist the corresponding increase in consideration. Alternatively, equitable relief might have been refused because any loss could be compensated by damages. The creditor therefore could not treat the debt as discharged merely because it had not dealt with it before completion.
5. Clause 6 used the audited accounts as the contractual yardstick. Those accounts showed the debt as owing. The creditor had had an opportunity to influence the accounts and had not objected to the debt’s inclusion. The court accordingly found for the claimant on the issue.

First-instance proceedings. The judgment concerned a point recalled from an earlier judgment in the same action; no appeal history is stated.