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Where, under a joint venture agreement, LTC Ltd agreed to procure that its nominee subsidiary, LN Ltd, would repay a loan and LN subsequently defaulted on the loan, LTC Ltd was liable in its place. The court held that the normal meaning of the word “procure” is to “see to it”. This means that, for example, if X agrees to procure that Y performs a contractual obligation, X must first attempt to procure that Y complies with it. If Y does not, X must pay damages calculated by reference to the amount that Y ought to have paid. An agreement to procure compliance with a contract term is therefore more than an administrative burden; it has the same legal effect as a guarantee. When a subsidiary company enters into a contract, it is common for the parent company to be joined as a party to act as the subsidiary’s guarantor. Often, as well or instead of a guarantee, the parent company will agree to procure the subsidiary’s compliance with particular terms of the contract. |
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Meaning of “procure” in a contract See CLM: ¶5469, ¶6603 |
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Nearfield Ltd v Lincoln Nominees Ltd [2006] EWHC 2421 (Ch) |
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Transactions at an undervalue See CLM: ¶7812+ |
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Barber and Henry v CI Ltd, unreported, 8 June 2006, Ch D (Manchester), Case no. 1242 or 2005 |
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The court has held that the discharge of a debt between a company and its director, which was liable to be set aside as a preference, could not constitute consideration for the payment of the money to a third party. This payment was accordingly set aside as a transaction at an undervalue. Mr S was the director of S Ltd. He borrowed £65,000 from CI Ltd personally, asking CI Ltd to pay the money directly to S Ltd. S Ltd recorded a debt for that sum to Mr S. Subsequently, S Ltd paid £50,000 directly to CI Ltd, discharging that amount of S Ltd’s debt to Mr S and Mr S’s debt to CI Ltd. Mr S then personally repaid the remaining £15,000 to CI Ltd. At first instance, the court ordered CI Ltd to repay the £50,000 to S Ltd as it was a transaction at an undervalue. CI Ltd appealed, arguing that the legislation did not stipulate who had to provide the consideration for the transaction, so discharge of S Ltd’s debt to Mr S could amount to valuable consideration for Mr S’s payment to it. However, the High Court found that the discharge of S Ltd’s debt to Mr S was liable to be set aside as a preference as it put Mr S in a better position in S Ltd’s insolvency. If the liquidators applied to have the payment set aside as a preference, the company’s debt would be revived rendering the value of this consideration to the company nil. Since the consideration was precarious and speculative, it was for CI Ltd to establish its value, and it had not done so. The High Court therefore upheld the first instance decision that the payment from S Ltd to CI Ltd was a transaction at an undervalue. The judge noted that there was no direct authority on the question of whether a preference could amount to good consideration for a transaction. However, his decision is entirely in accordance with the purpose of the relevant provisions as it prevents companies from prejudicing their creditors by finding a way around the restrictions on transactions prior to their insolvency. Liquidators and administrators can challenge certain transactions entered into by a company prior to its insolvency, including transactions at an undervalue and preferences (¶7808+). This is to prevent companies from putting their creditors in a worse position by dissipating their assets and favouring connected parties. |
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