Recent Court decision shows the value of sellers seeking protection against defaulting buyers

In the recent case of Hedger v Adams, the Claimant sold assets to the Defendants company on a deferred consideration. The Defendants company, the Defendant and the Claimant all received legal advice on the transaction. No secondary security was sought to protect the Claimant.

The Defendants company initially kept up with the repayments under the agreement, but eventually fell into arrears; eventually the company went into liquidation, with 50% of the deferred consideration still owed to the Claimant.

The Claimant sued the Defendant personally for breach of duty, but lost on the basis that the Defendant had acted in good faith and had not done anything wrong; he had simply been a victim of circumstance in the failure of his business. In essence the Claimant had proceeded with the transaction on a deferred consideration basis at his own risk.

This case is a salutary lesson in the value of secondary security (such as a charge on a clean asset or a directors personal guarantee) to secure the position of the seller and manage the risk of default. With secondary security in place the Claimant would have been able to take a more straightforward recovery action against the Defendant.

It also shows that the Court is not willing to lift the corporate veil in the absence of serious wrongdoing on the part of the director.

If you would like to discuss the issues arising from this case further then please contact Peter Brewer.