The High Court has held that where litigation is commenced against the administrator of a company, arising out of contractual obligations entered into in that capacity, he or she will not be personally liable, despite the insolvent company being unable to meet the resulting liability.(1)
In late 2008 the defendant, Mr Morris, was asked to act as the administrator of two companies. At that time the companies were involved in litigation with a third party, Haven. In order to continue the action, the defendant sought solicitors to act for the companies on a conditional fee basis. The claimant was willing to act on this basis and proposed two conditional fee arrangements, one for its initial advice and the other for acting in the litigation instituted by Haven against the insolvent companies.
The defendant was subsequently appointed as administrator of both companies and entered into the conditional fee arrangements with the claimant. Both conditional fee arrangements were addressed specifically to the defendant. They did not contain a disclaimer of personal liability, although other documents in the litigation did, including some prepared by the claimant.
The litigation against Haven was concluded by way of settlement, whereupon the claimant was not paid its fees. The claimant proceeded to sue the defendant for payment. That claim was heard in April 2010, with the claimant obtaining a costs order against the defendant. The court order named the defendant as "Mr Duncan R Morris (Administrator for Marketbalance Ltd and Phoenix Insurance Management Limited)". However, the judge did not address any issue as to the identity of the contracting parties. The companies had insufficient funds to discharge the amount of the order; the claimant therefore applied to the court for an order making the defendant personally liable.
Naming the administrator with reference to his office
In considering whether the defendant should be personally liable, the court considered the pleadings in the claim. The claim form in the action originally named the defendants as "Mr Morris, Mr Heaselgrave, together trading as the Redfern Partnership". This was later amended to read "Mr Morris, the Administrator of Marketbalance Ltd and Phoenix Insurance Management Limited". The invoices accompanying the claim form were also amended so that they were addressed to Morris in his capacity as administrator.
The court found that the fact that the claim form, pleadings and a costs order named the administrator as the defendant by reference to his office recognised that the administrator was liable as an agent of the company, not in his personal capacity.
The court considered submissions by the claimant that an insolvency professional should be treated in the same way as a trustee - that is, as being personally liable for his or her actions (in the absence of an agreed indemnity). However, on the basis that insolvent companies remain separate legal entities, the court did not accept that the position of an insolvency practitioner is the same as that of a trustee. The noted exception to this principle arises when an insolvency practitioner initiates proceedings and thereby obliges the opponent to incur costs. In these circumstances the insolvency practitioner can be personally liable for adverse costs, even though he or she has brought the action as an agent of the insolvent company.(2)
Assumption of personal liability
The court went on to consider whether the judge had made an express or implied finding as to personal liability, or whether there was a common assumption between the parties as to liability.
In finding that the case had proceeded before the trial judge on the basis that liability would fall on the companies' estate in administration, the court particularly relied on the following factors submitted on behalf of the defendant:
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There was no express provision for personal liability in the conditional fee arrangements or other contracts between defendant and claimant, and the court was reluctant to draw an inference in favour of solicitors in a contract drafted by them where there was no evidence of a specific agreement.
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The claimant responded to the initial defence by amending the claim form to leave only Morris as the defendant. In doing so, the claimant removed his trading partner, who would have been jointly liable had the defendant been found to be personally liable to the claimant.
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The trial proceeded on the tacit basis that the defendant was not personally liable. This position was set out in the defence, was not disputed in the reply and was not contested at trial. At no point was the issue of personal liability raised before the judge. It appeared to the court that the claimant's counsel even recognised this position. For example, the court referred to the fact that:
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at trial, the claimant's counsel had referred to the paragraph of the defence which named the companies as the defendants as being part of the uncontested "chronology" of the case;
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the trial judge had not considered that paragraph of the defence and had excluded it from what he considered to be the "substance of the defence"; and
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the claimant had argued certain points at trial which would have been irrelevant had Morris been considered personally liable. These included the apportioning of costs between the two companies and the claimant's priority of payment in the companies' administration.
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This decision will be welcomed by insolvency practitioners, as it affirms the limit on their personal liability for actions while holding office. In particular, the court's rejection of the analogy between trustees and insolvency practitioners reinforces the general rule established in Re London Metallurgical Co [1895] 1 Ch 758 that the costs of a party successfully suing a insolvency practitioner are to be paid out of the company's estate.
It is common practice in insolvency litigation to name the defendant personally with reference to the office held. Had the claimant's application succeeded, insolvency office holders might have been personally liable wherever a claim form or court order named them as defendants, even by reference to their position as office holders.
This decision will also be of interest to parties that find themselves pursuing an insolvent company. Although their claim may be successful, if there are insufficient assets to meet damages or costs awarded in the company's estate, the winning party will be unable to look to the insolvency office holder to meet any shortfall and may be left with an unsatisfied judgment.
For further information on this topic please contact Laura Martin at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
Endnotes
(1) Wright Hassell LLP v Morris [2012] EWHC 188 (Ch).
(2) Following the rule in Re Wilson Lovatt & Sons Ltd [1977] All ER 274.
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