What is a Liquidated Debt? Guideline High Court Ruling in Bankruptcy Case

Only liquidated debts, for specific amounts which have been ascertained fully and finally, can form the basis of bankruptcy petitions. As a High Court case showed, however, discerning which debts fall into that category can be far from easy.

The case concerned a businesswoman who had engaged in joint ventures to build luxury care homes. She and her associate in those ventures were directors and shareholders of five companies. After they fell out, they executed a settlement agreement which was intended to mark a parting of the ways and to resolve all disputes between them.

By that agreement, the associate promised to pay the businesswoman £1.25 million by a specific date. The timing of that payment was expressed to be of the essence and it was agreed that the sum would be remitted without any set-off, deduction, counterclaim, or reduction of any kind. After the deadline date came and went without payment, the businesswoman petitioned for the associate’s bankruptcy.

He, however, argued that the debt was not for a liquidated amount, within the meaning of Section 267(2)(b) of the Insolvency Act 1986, and that the petition should thus be struck out as an abuse of process. It was submitted that, on a true interpretation of the agreement, his duty to pay the £1.25 million was dependent on the businesswoman transferring her shares in the companies, either to him or to anyone else he might nominate.

In dismissing those arguments, however, the Court found that the settlement could not be viewed as a share sale agreement. The unqualified obligation to pay the money by the specified date and the requirement to transfer the shares were not dependent upon one another and the former was intended to precede the latter.

The businesswoman’s objective was to withdraw from the joint ventures and the transfer of her shares was a tidying up exercise to be performed only after she had received the £1.25 million. There was no obligation to execute the two transactions simultaneously. The Court’s ruling that the sum claimed was a liquidated debt opened the way for the businesswoman to proceed with her petition.