For further information, please contact David Weare, Partner, Fladgate LLP (firstname.lastname@example.org)
Some readers may remember an earlier article which highlighted a dispute between Trebor Bassett/Cadbury and ADT Fire and Security.
As a quick recap, ADT had designed a bespoke fire fighting system installed in a popcorn factory owned by a partnership which was a subsidiary of the confectioner Cadbury (Cadbury Partnership). When a fire started in the factory the ADT designed system failed and the factory was completely destroyed. The Cadbury Partnership sued ADT for the damages caused. The court found in favour of the Cadbury Partnership but reduced the award by 75% for its contributory negligence. This decision was upheld on appeal.
The exact amount of the damages is still being calculated but Kraft, the US company which had purchased Cadbury (including the Cadbury Partnership) in 2011, brought a claim for an interim payment of £15 million which was resisted by ADT. Meanwhile, the Cadbury Partnership was dissolved.
ADT argued that Kraft had no right to sue on the basis that changes in the company structure and other contractual assignments meant that the benefit of the judgment was held either by an unrelated third party or by the dissolved partnership.
The court said that the benefit of the contract had not been assigned to a third party but was not convinced that Kraft had successfully purchased the cause of action. The court stated that the wording included in the sale and purchase agreement was arguably not wide enough to achieve this.
So, what happens to the claim? Does it fall into a ‘black hole’ where no existing entity has title to sue?
Thankfully for Kraft, the three companies that made up the Cadbury Partnership were still in existence, and although they were not party to the claim against ADT they could become so. The court decided that it would be wrong in principle if an otherwise clear entitlement to an interim payment was frustrated because of an absence of clarity as to which company might be the ultimate beneficiary.
It was decided that the absolute minimum recoverable from ADT would be £4 million and this was awarded to Kraft.
This dispute highlights the care that must be taken when dissolving a company or a partnership. Although the courts will go to some lengths to ensure that a claim does not disappear down a ‘black hole’ just because there has been a change in the status of the original contracting entity, it will not always be possible to preserve the claim. If a company or partnership is to be dissolved the directors of any parent company should, therefore, take steps to ensure that all the legal and beneficial interests of the dissolved entity are properly assigned. This is not just in the case of major share purchases but also when undertaking even minor restructuring.