Kirit Lalji Thakrar -v- Ciro Citterio Menswear Plc (2002) ChD

© Daniel Atkinson 2002      13 October 2002        

The decision in Kirit Lalji Thakrar -v- Ciro Citterio Menswear Plc in administration (2002) ChD raises the interesting issue whether a settlement agreement expressed as a Tomlin Order was binding even if the Tomlin Order was not enforced by the Courts. A Tomlin Order is a form of consent order by the Judge in which further proceedings in the action are stayed, except for the purpose of carrying into effect the terms of the agreement in the schedule to the Order. The further point is whether a compromise is enforceable if the underlying contract is illegal.

Kirit sought a declaration that Ciro was bound by terms of a settlement agreement. The agreement in question was contained in a draft Tomlin order signed by the solicitors for Kirit and Ciro on 9^th August 2002.

The facts are as follows. In June 2002 there were telephone conversations and correspondence between the solicitors for Kirit and Ciro regarding the possibility of a settlement of all issues between them. This was in the context that there had been a settlement of the issues between Kirit and the individual respondents to the action or their trustees in bankruptcy and appropriate requests by them for the withdrawal of their appeals or applications had been lodged. By the end of July 2002 it had been agreed that Kirit and Ciro should seek the assistance of a mediator. On 2^nd August 2002 Kirit and Ciro signed a CEDR Solve Mediation Agreement and a mediator was appointed.

It was agreed that any agreement resulting from the mediation would be conditional on (a) its being recorded in writing and signed by the parties and (b) approved by a majority of the creditors’ committee of Ciro.

The mediation took place on 8^th and 9^th August and was successful. The solicitor for Ciro completed a draft order in Tomlin form, which he had prepared in advance of the mediation, with the terms of the settlement arising from the mediation. The draft order was signed by solicitors for Kirit and for Ciro and the Administrators and by the mediator.

Ciro applied for an order in the form of the draft Tomlin order and the application was supported by counsel for Kirit. Chadwick LJ in the Court of Appeal explored with counsel for Ciro and the Administrators the implications of the compromise on the creditors and members of Ciro. The court indicated that it was not minded to make an order in the agreed form. Chadwick LJ recorded that the Court was concerned that its apparent approval to a compromise in the terms proposed might be misconstrued as approval of the payment of £800,00 to Kirit, ahead of the unsecured creditors. He took the view that a court which had to consider the matter in the administration proceedings ought to have the benefit of the views of the Court of Appeal as to the true position. The administrators were not prepared to agree again to the same terms as before because the judgment of the Court of Appeal had substantially altered the negotiating strengths of the parties.

In these most unusual circumstances Kirit sought a declaration before the Vice Chancellor that Ciro was bound by the terms of the settlement reached in the mediation. It was common ground that the court was entitled to conclude that Ciro was so bound because it was clear from the judgment of Chadwick LJ that the Court of Appeal did not conclude that there was no immediately enforceable contract. It was also common ground that by virtue of s.14(1) and Schedule 1 para.18 Insolvency Act 1986 the administrators had the power to enter into the alleged compromise without the approval of the court or the creditors’ committee and notwithstanding the possibility of a subsequent challenge under s.27 Insolvency Act 19886. They might, but were not bound to, seek the directions of the court under s.14(3) Insolvency Act 1986. The creditors’ committee exists to assist the administrators, Insolvency Rules 2.34(1), and did in fact approve of the terms. It was not suggested that the mediation was anything other than bona fide or that the resulting agreement was anything other than a genuine commercial transaction.

It was also common ground that an agreement to settle contained in a draft Tomlin order was not of its nature conditional on the making of the order; it may or may not be depending on its true construction.

The Vice Chancellor held that existing proceedings may be settled in a number of ways as described by Slade J in Green -v- Rosen [1955] 1WLR 741. Likewise differences may be compromised without the need for any proceedings at all. The purpose of a Tomlin order was to enable the enforcement of the terms of settlement of an existing action by summary process in that action. The alternative in most cases is to commence separate proceedings for the specific performance of the contract of settlement. Thus, as is common ground, the contract of settlement is capable of being distinct from the Tomlin order or any agreement to procure it. An example of such distinct contracts is afforded by Horizon Technologies Ltd v Lucky Wealth Consultants Ltd [1982] 1 WLR 24. The parties can achieve that result without going through the labourious process of first making a contract and then scheduling it to the Tomlin order. The Vice Chancellor held that was what the parties did in this case.

First, the compromise included issues arising outside the litigation pending before the Court of Appeal. Second, the terms negotiated in the mediation and set out in the Schedule to the draft Tomlin order were expressly subject to two conditions, namely that those terms were to be reduced to writing and signed by or on behalf of the parties and that the approval of a majority of the creditors’ committee was required. Both those conditions were satisfied. The Vice Chancellor held that in those circumstances effect should be given to the terms contained in the schedule unless the intention to subject them to a third condition was clearly established.

Third, the terms of the attached Schedule were in themselves complete except for the reference to the order, but that reference did not reveal any intention at all, let alone one of sufficient clarity as to justify the imposition of a third condition.

Fourth, the recital to the order stated that the parties had agreed the terms set out in the Schedule which indicated an intention that the parties were to be treated as having already made a contract in those terms even though in this case there was no earlier agreement in fact. The recital was in the standard form of Tomlin order and it may be that a compromise scheduled to such an order may be conditional on the order being made. Nevertheless given the terms of the schedule in this case, the Vice Chancellor held that the recital was express confirmation of an intention that the compromise should be regarded as both prior to and independent of the making of the order.

Fifth, in the same way that the Schedule was in terms independent of the order, the order was required for purposes additional to providing for the enforcement of the terms in the schedule.

For all these reasons the Vice Chancellor concluded that the agreement contained in the schedule to the draft Tomlin order was not conditional on the making of that order.

That dealt with the first issue.

Ciro then argued that the court should not enforce the compromise any more than it would the underlying illegal transaction. For those propositions it relied on Chitty on Contracts 28^th Edition Vol 1 pp843 - /844 and Foskett, the Law and Practice of Compromise 5^th Edition pp 71 - 72.

Kirit argued that the decision of the Court of Appeal in Binder v Alachouzous [1972] 2 QB 151 established that the court will enforce bona fide compromise of a dispute whether or not the underlying agreement was illegal, at least if it included an issue of fact.

In that case Roskill LJ held that where there was a bona fide compromise of what was basically an issue of fact, especially where the compromise has been reached under the advice of Counsel and solicitors, that compromise was enforceable against the party seeking subsequently to repudiate it. Any other course would cause very great difficulty in the administration of justice. It was held that the court should encourage and when appropriate enforce any bona fide compromise arrived at, especially one arrived at under legal advice.

The Vice Chancellor did not consider that Roskill LJ had restricted the issue solely to one of fact. The Vice Chancellor held that the compromise arising from the mediation was one which the court could and should uphold. The mediation was genuine and the resulting agreement arrived at on a proper commercial basis. Each side was represented by experienced solicitors and had the assistance of skilled accountants. On the basis of the evidence adduced in the mediation the extent of Ciro’s distributable profits as at December 2000 was arguable. On one view they were sufficient to cover the amount of the liability for the shares declared by the Court or the lesser amount arising from the compromise. Whilst the question whether the occurrence of all members of a company can satisfy the requirement of a special resolution imposed by s.164 Companies Act 1985 on the principle of Re Duomatic Ltd[1969] 2 Ch.365 may be a question of law, it was but one only of the questions relevant to the basic issue of whether the purchase or financial assistance was lawful or not. The Vice Chancellor did not accept that it was permissible to subdivide the basic issue, isolate a pure point of law and then avoid the application of the principle of Binder v Alachouzos however bona fide the compromise may be.