Doherty v Fannigan Holdings Ltd

The Court of Appeal held that the appellant's failure to pay the Tranche E purchase price did not create an immediately enforceable liability in "debt … for a liquidated sum" so as to justify a statutory demand and a creditor's bankruptcy petition under sections 267 and 268 of the Insolvency Act 1986. The court construed the share sale agreement (in particular clauses 2, 3, 5.1 and 8.1) as creating mutually dependent obligations: payment and transfer were to be performed contemporaneously and one party could not enforce the other's primary obligation in debt while retaining the subject matter. Consequently the proper remedies for the vendor were specific performance or damages (including damages following termination), not a claim in debt for the price while retaining the shares.

Background and parties: The dispute arose from a 29 June 2012 agreement under which the respondent, Fannigan Holdings Ltd (FHL), agreed to transfer shares in Our Enterprise Haslar Limited to Patrick Doherty in eight tranches for staged payments totaling £14m. Tranche E was a payment of £2m due on 1 July 2015 for 12.85% of OEHL's issued shares.

Procedural posture: Mr Registrar Jones set aside a statutory demand served by FHL on Mr Doherty and ordered FHL to pay costs. On 28 February 2017 Stephen Smith QC, sitting as a Deputy High Court judge, allowed FHL's appeal, reinstated the demand and permitted presentation of a bankruptcy petition. Hickinbottom LJ granted permission to appeal to the Court of Appeal and stayed the petition.

Nature of the claim / relief sought: The immediate issue was whether Mr Doherty's non‑payment of £2m on the payment date created an immediately enforceable debt for a liquidated sum so that FHL could serve a statutory demand and present a bankruptcy petition under ss.267–268 Insolvency Act 1986. Mr Doherty applied to set the statutory demand aside.

Issues framed:

• Whether the purchaser's obligation to pay and the vendor's obligation to transfer the Tranche E shares were independent or dependent obligations;
• Whether non‑payment gave rise to an immediately enforceable claim in debt for a liquidated sum or only to contractual remedies such as specific performance or damages/termination.

Court's reasoning: The court analysed the definitions and operative provisions of the agreement (clauses 2, 3, 5.1 and 8.1) and the parties' evident commercial intentions. Although certain definitions identified the payment date and completion date, the operative provisions showed that completion was intended as an exchange: receipt of payment would be followed immediately by delivery of share transfers and certificates. The judge's contrary reliance on sequencing in the definitions was treated as weak; the proper interpretation, aided by analogy with sale‑of‑land practice and established principles on dependent obligations, was that the obligations were mutually dependent. On that construction the purchaser did not become a debtor for the price upon non‑payment and FHL's appropriate remedies were contractual (specific performance or damages) rather than presentation of a bankruptcy petition based on a statutory demand for a liquidated debt.

Subsidiary findings and context: The court noted earlier conduct: Mr Doherty had previously paid earlier tranches late and accepted the conventional remedies in those cases. The court considered historical authorities and contract‑law principles on dependent versus independent covenants, and observed that contracts for sale of shares in their relevant essentials could be analogous to sale of land for the purpose of inferring dependent obligations.

Appeal allowed. The Court of Appeal concluded that the parties' obligations to pay the Tranche E purchase price and to transfer the Tranche E shares were mutually dependent; non‑payment did not give rise to an immediately enforceable debt in respect of the £2m and therefore FHL was not entitled to serve a statutory demand or proceed to bankruptcy on that basis. The proper remedies available to FHL were specific performance or damages/termination.

Registrar Jones (Mr Registrar Jones) set aside FHL's statutory demand on 11 August 2016 ([2016] EWHC 2098 (Ch); [2016] BPIR 1377). On 28 February 2017 Stephen Smith QC, sitting as a Deputy High Court judge, allowed FHL's appeal and reinstated the demand. Permission to appeal to the Court of Appeal was granted by Hickinbottom LJ on 24 May 2017, with a stay of the bankruptcy petition. The Court of Appeal allowed Mr Doherty's appeal on 12 July 2018.