Where the entirety of a debt is not included in an agreement to settle, a creditor can continue to prove in a bankruptcy for the balance.

The bank in Bank of Baroda v Patel and another obtained a charging order over a husband's interest in the matrimonial home in relation to the outstanding debt of approximately £180,000 due on a judgment. The husband became bankrupt on his own petition. The wife subsequently offered £22,000 to the bank "in full and final settlement of [the bank's] .. interest in" the property. No mention was made of the still outstanding underlying debt due to the bank. The bank accepted the sum offered in "full and final settlement" and agreed to release the charging order. The trustee in bankruptcy considered that the bank was still entitled to prove in the husband's bankruptcy for the remainder of the underlying debt. The wife claimed the payment to the bank had been in full and final settlement of all of the husband's indebtedness to the bank and made an application under s303 Insolvency Act 1986 to reverse the trustee's decision. The bank contended that the payment was only in consideration of the release of the charging order over the property.

The court held that the wife's offer had been put in terms of removing the bank's interest from the property, not in terms of a full and final settlement of the entirety of the husband's debt to it. No reference had been made to a full and final discharge of the underlying debt and much clearer language would have been necessary if that was the intention. The bank had merely echoed the language used by the wife when referring to "full and final settlement". The bank was entitled to prove in the bankruptcy and there had been no perversity or bad faith on behalf of the trustee.

Things to consider

This case once again highlights the need to take great care when agreeing any terms of settlement. It would be safer to specify in situations such as this, specifically what is and, as importantly, what is not being settled to avoid any uncertainty.