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Saturday, 26 November 2011

Forfeiture of deposit in business purchase

When a deposit has been forfeit, and when it should be returned, is not always an easy question. The chances are that the parties involved will have different views about the matter, but a recent High Court case sheds light on the question.
A purchaser failed to complete the purchase of a business from a company in administration. Frequently a sale as a going concern will be the best way to maximise the value of the insolvent company. Because cash reserves to keep the business going are likely to be small and the timetable for the sale will be tight, the administrator might insist on a non-refundable deposit to provide comfort that the purchaser will complete. It might be very difficult to find another purchaser if the first one pulls out.
Here, the buyer was not in a position to complete immediately. The administrator agreed that the buyer could occupy the leasehold premises from the date of exchange of contracts, and to operate the business, on payment of a deposit of 10 per cent of the value of the leasehold property and 50 per cent of the value of processing equipment. The deposit would be forfeit if the buyer did not complete in accordance with the contract.
When it did not complete, the administrator applied for a court order permitting him to distribute to the secured creditors such funds as had been realised. He expressly sought permission to distribute the buyer's deposit, but the buyer challenged this on the basis that the amount of the deposit was unreasonable. On the basis of Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] UKPC 7, a contractual clause permitting the forfeiture of a deposit could amount to an unlawful penalty, and the buyer argued that this was the case here. The court declined to follow that case, though, and held that a deposit could not be challenged in this way. It was not compensation for loss that might be sustained as a result of a failure to complete: it was to demonstrate to a seller that the buyer had a genuine commitment to complete. The court had power to order the return of the deposit - which it said amounted essentially to a discretion to order relief from forfeiture -  at common law or under section 49 of the Law of Property Act 1925. It might be appropriate to make such an order if the deposit were unreasonably large, although in this case the evidence on this point did not suffice to enable the court to decide one way or the other.
Amble Assets LLP and another v Longbenton Foods Ltd [2011] EWHC 1943 (Ch) (21 July 2011).

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