Full and final settlements (F&Fs)

If your circumstances improve or someone is willing to assist, you may be able to offer your creditor(s) a lump sum to settle your debt(s). This could be a good way to clear debt(s) that would otherwise take years to repay. You have to take steps to ensure the creditor does not sell on the remainder of the balance or chase you for it at a later date.
What is a Full and Final settlement?

DealWith a full and final settlement, you offer to pay your creditor(s) an amount lower than the outstanding balance as a lump sum, the rest gets written off.

Full and final settlements can be a good alternative to years of low repayments for both you and your creditor(s). You should emphasise this fact when making your offer.

Creditors are more likely to accept your offer if you are only paying tokens or a small amount every month, than if you are making sizable payments.

Debt purchasers pay a fraction of the balance for the account, usually no more than 10%. This means they are much more likely to accept a reduced settlement than the original lender.

If you have not made any payments towards the account for some time, making a lump sum offer is likely to reset the statute barred clock. See statute barred debt for more information.

Consider offering a lump sum to clear debts you are repaying and/or that are enforceable, rather than debts you are not repaying and/or are unenforceable. See challenging debts.

Start by making a low offer and negotiate up if necessary. 20% may be a good start. If you start too high, you won’t have room for negotiation.

It is important to take steps to ensure that the creditor does not either pursue you for the unpaid balance themselves or sells it on to a debt purchaser who will pursue you.
The closest you can get to a watertight full and final settlement is by making payment via a third party cheque.

Payment via a third party cheque means a legally binding agreement between the creditor and the third party rather than the debtor, upon the cheque being cashed by the creditor.

Cheques issued by your partner/husband/wife may not always count as “third party” for legal purposes. See Inland Revenue Commissioners v Fry.
Formula for calculating pro-rata offers
If you have a lump sum available and wish to make an offer to more than one creditor, use the following formula:

Lump sum available x Individual debts
________________________________ = Individual offers
Total amount to repay

For example, if you have £5,000 available to repay the debts listed below, you’d do the calculations as noted.

Debt Amount Calculation Pro-rata offer
Debt1 £2,500 5,000 x 2,500 ÷ 11,000 = 1,135
Debt2 £3,500 5,000 x 3,500 ÷ 11,000 = 1,590
Debt3 £5,000 5,000 x 5,000 ÷ 11,000 = 2,275
Total £11,000 5,000
It may help get offers accepted if you show your creditors they are all receiving a pro-rata offer.
Legal background overview
Although the following information is aimed at creditors, it provides a useful guide to full and final settlements for debtors.

Lessons from case law

Whilst the courts are not willing to draw “hard and fast” rules between cases, it is clear that they are willing to look at the overall circumstances of each case, the background giving rise to each claim and the conduct and intentions of both parties in (a) offering a sum in full and final settlement and (b) accepting the same. However, there are some important considerations in dealing with offers made in full and final settlement:

Is the cheque from the debtor or a third party? If the cheque is from a third party then accepting it in any event would make a binding agreement between yourself and a third party, meaning that the matter would be considered settled.

Is there a genuine dispute regarding the debt? If not and the offer is simply made as a delaying tactic in order to put pressure on the creditor and reduce the debtor’s liability, then it may still be possible to bank the cheque and pursue the balance.

Are the terms of acceptance clear? If the offer is made with no conditions imposed in the event that it is rejected then it may be possible to still bank the cheque on the basis that it is ‘part payment on account’ only. If it is specified that it must not be cashed if the offer is not accepted then it must not be cashed.

Timeliness in responding to the offer is key. The Courts have been clear that any delay in responding to the offer and holding on to the cheque may be viewed as the acceptance.

Is the cheque ultimately honoured? If not, then an agreement may already have been deemed to be concluded. Nevertheless, it would be possible to bring an action immediately in respect of the dishonoured cheque.

Given the potential implications in unwittingly accepting a reduced sum in settlement, creditors would be well advised to consider their processes upon receiving cheque payments and responding to cheques offered in full and final settlement.

Source: DWF
Pinnel's Case

Pinnel’s Case shows that just because a creditor has ‘accepted’ a partial payment on an outstanding balance, it doesn’t necessarily lose the right to pursue the debtor for the remainder of the balance. However, one exception to the rule is when payment is made via a third party.

THE GENERAL RULE

If one person owes a sum of money to another and agrees to pay part of this in full settlement, the rule at common law (the rule in Pinnel’s Case (1602) 5 CoRep 117a) is that part-payment of a debt is not good consideration for a promise to forgo the balance. Thus, if A owes B £50 and B accepts £25 in full satisfaction on the due date, there is nothing to prevent B from claiming the balance at a later date, since there is no consideration proceeding from A to enforce the promise of B to accept part-payment. This is because he is already bound to pay the full amount, an agreement based on the same principle as Stilk v Myrick (1809). It also protects a creditor from the economic duress of his debtor.

In Pinnel’s Case (1602), Cole owed Pinnel £8-10s-0d (£8.50) which was due on 11 November. At Pinnel’s request, Cole paid £5-2s-2d (£5.11) on 1 October, which Pinnel accepted in full settlement of the debt. Pinnel sued Cole for the amount owed. It was held that part-payment in itself was not consideration. However, it was held that the agreement to accept part-payment would be binding if the debtor, at the creditor’s request, provided some fresh consideration. Consideration might be provided if the creditor agrees to accept:

  • part-payment on an earlier date than the due date (i.e., as in Pinnel’s Case itself); or
  • chattel instead of money (a “horse, hawk or robe” may be more beneficial than money); or
  • part-payment in a different place to that originally specified.

EXCEPTIONS TO THE RULE

Apart from the exceptions to the rule mentioned in Pinnel’s Case itself, there are two others at common law and one exception in equity.

A) PART-PAYMENT OF THE DEBT BY A THIRD PARTY

A promise to accept a smaller sum in full satisfaction will be binding on a creditor where the part-payment is made by a third party on condition that the debtor is released from the obligation to pay the full amount. See:

Hirachand Punamchand v Temple [1911] 2 KB 330 – A father paid a smaller sum to a money lender to pay his son’s debts, which the money lender accepted in full settlement. Later the money lender sued for the balance. It was held that the part-payment was valid consideration, and that to allow the moneylender’s claim would be a fraud on the father.

B) COMPOSITION AGREEMENTS

The rule does not apply to composition agreements. This is an agreement between a debtor and a group of creditors, under which the creditors agree to accept a percentage of their debts (e.g., 50p in the pound) in full settlement. Despite the absence of consideration, the courts will not allow an individual creditor to sue the debtor for the balance: Wood v Robarts (1818). The reason usually advanced for this rule is that to allow an individual creditor to claim the balance would amount to a fraud on the other creditors who had all agreed to the percentage.

C) PROMISSORY ESTOPPEL

This is the name that has been given to the equitable doctrine which has as its principal source the obiter dicta of Denning J in High Trees House Ltd [1947] (see below)

PROMISSORY ESTOPPEL

A further exception to the rule in Pinnel’s Case is to be found in the equitable doctrine of promissory estoppel. The doctrine provides a means of making a promise binding, in certain circumstances, in the absence of consideration. The principle is that if someone (the promisor) makes a promise, which another person acts on, the promisor is stopped (or estopped) from going back on the promise, even though the other person did not provide consideration (in so far as is it is inequitable to do so).

Third party cheques

In Hirachand Punamchand v Temple [1911] 2 KB 330 the Court of Appeal ruled that the part payment was enough to discharge the debt as the payment was made via a third party.

Hirachand Punamchand v Temple [1911] 2 KB 330 Court of Appeal

The claimants were money lenders in India. They lent money to the defendant Lieutenant Temple who was an army officer serving in India. The claimants sought return of the money from the claimant but were unable to get any response so they contacted his father. Some correspondence went between the claimant and the father’s solicitors. The claimants asked how much the father would be prepared to pay to settle the son’s accounts. An amount was agreed which was a substantial, amount although not the full amount due. The claimant promised to send the promissory note relating to the son’s debt to the father once they received payment. The father paid, but the claimant retained the promissory note and sued the son to enforce the balance.

Held:

The payment made by the father was sufficient to discharge the full balance. Where the person making payment in return for discharging the debt owed by another this will amount to good consideration as the existing duty to make payment was not owed by them but a third party.

Offer letter

The letter below should be sent recorded delivery to the creditor you wish to make an offer to.

FullAndFinal

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Relevant case law