Ernest Richard Hemmings v Jerome Carl Mathias & Anor

For contractual purposes, repayment of a debt is not confined to the transfer of cash. It may be achieved by set-off, release or compromise where the creditor agrees that the consideration received discharges the whole debt. The underlying cross-claim need not be undisputed or objectively valued at an amount equal to the debt. The relevant question is whether the creditor agreed to accept the consideration in full discharge. A settlement covering wider claims may therefore amount to repayment if its terms show that the debt was wholly released and discharged. A creditor’s mere acceptance of less than the debt, without additional consideration and without agreeing to discharge the debt in full, would not ordinarily constitute repayment.

The claimant had sold shares to the first defendant under a share purchase agreement. The agreement required the buyer to procure repayment by a group company of approximately £150,000 owed to another group company, and provided an indemnity if the claimant was later required personally to repay that debt.

The buyer did not procure a direct payment within the contractual period. The relevant companies and their liquidators later entered into a wider settlement under which £200,000 was paid and mutual claims were released. The claimant subsequently settled claims brought against him by the liquidators and sought the contractual indemnity. The preliminary issues were whether the settlement amounted to repayment of the defined debt and, if not, whether the indemnity was engaged.

1. Construction of the defined debt. The natural meaning of the defined debt was approximately £150,000 of particular indebtedness arising from diverted payments, rather than whatever amount was ultimately found to be due. This was supported by the warranty that the debt did not exceed £150,000 and by the indemnity cap. The risk of a greater amount being due was assumed by the claimant.
2. Meaning of repayment. Payment of a debt may be made by set-off of a cross-claim as well as by cash. The cross-claim need not be undisputed as to existence or amount. The critical question is whether the creditor agrees to discharge the whole debt in return for the consideration received. The court rejected the need for litigation or expert valuation to establish the objective value of a disputed claim.
3. Application. The settlement expressly provided for the full and final release and discharge of all claims, including the debt in question. The liquidators agreed to accept the payment and releases as sufficient consideration for discharging that debt. The fact that the settlement covered wider claims did not prevent it from constituting repayment.
4. The court accepted that a simple payment of less than the full debt, without additional consideration and without agreement to discharge the debt in full, would not constitute repayment. That qualification did not apply to the settlement made here.
5. Preliminary issue 1 was answered yes: the first defendant had procured repayment in accordance with the agreement. Preliminary issue 2 therefore did not arise. The court noted that the discharge should have the same effect, for assessing loss caused by the claimant’s conduct, as payment of £150,000, but made no determination on the credit actually given in the claimant’s separate settlement with the liquidators.