Re Schebsman [1944] Ch 83, 89

Contract - Contract for benefit of third party - Bankruptcy - Settlement -Performance by payment to third party

Facts:

The debtor worked for a company and its subsidiary. When his employment ended, a contract was drawn up between him and the companies that he should receive compensation for loss of employment, payable on specified dates. In the event of his death, the funds were to be paid to his widow and in the event of her death, to his daughter. The debtor was made bankrupt and died sometime afterwards. The official receiver of the deceased and bankrupt’s estate included the payments in the total sum of the estate to repay his debts. The widow and wife claimed that the compensation did not form part of the estate.

Issues:

Whether the funds formed part of the estate for the purposes of the bankruptcy administration. Whether the widow and the daughter were entitled to continue to receive the payments as third party beneficiaries to the contract.

Held:

The contract did not create a trust in favour of the widow or the daughter to provide them with funds. As per the terms of the contract, the debtor (if still alive) would have been unable to divert the payments as it would have constituted a breach of contract. The official receiver could not rely on any principles in equity as no principle would allow for the diversion of funds away from the debtor or his nominated family members, resulting in a breach of contract. Therefore, the widow and daughter were entitled to keep the funds already paid by the company and continue to receive further payments as per the contract.