A recent decision of a High Court Judge (Mr Justice Thompsell, a former solicitor who I know and respect) has shed light on what seems to have been a misunderstanding by Insolvency Practitioners (or, perhaps, was a vain attempt by their legal advisers to head off a claim) of the effect of pre-appointment Letters of Engagement. Whilst the case is obviously English, the statutory provisions discussed are of UK relevance and the cases cited would be equally persuasive in Scotland and Northern Ireland, so the decision is relevant to all appointment-takers in the UK.
The Liquidators in the Members’ Voluntary Liquidations of three Core VCT companies (the “Companies”) and their firm and an associated business (together, the “Defendants”) appeared before the Chancery Division in connection with separate but conjoined actions against them based upon, amongst other matters, the sale of certain assets of the Companies during the course of each of the liquidations. It was claimed that the Defendants were liable for what was claimed, in effect, to be negligence in these sales as to the value at which the assets were sold.
The claim against the liquidators was that they were in breach of their duties to the Companies and the claim against their firm and the associated business was that they (either or both) owed contractual duties (in terms of the Letters of Engagement) to the Companies and/or were vicariously liable for the conduct of the liquidators.
The Defendants all sought to rely upon the limitation of liability clause in each of the relevant Letters of Engagement that had been issued at the outset of the process. The decision relating to the liquidators’ defence (effectively based upon statute) was (unsurprisingly, I would have thought) that a company could not, by way of accepting a limitation of liability clause, contract out of the obligations owed by an office-holder because those obligations were not owed (or, in some cases, not exclusively owed) to the company, they were owed to a wider constituency: members, creditors, etc. and those duties also included statutory obligations which could not be modified, excluded or avoided. The liquidation process constituted a statutory trust and in a short but telling phrase, the Judge said:
“the liquidator now must be seen as being a fiduciary holding assets on a trust to be administered according to statute, and not giving any beneficial ownership right to creditors, to contributories or indeed to the company itself.”
As I said, I wouldn’t have thought that this would come as a surprise to most Insolvency Practitioners, but the judgement is a detailed and useful reminder of the position of a liquidator. In Scotland, of course, where the rules and responsibilities of a liquidator grew out of the pre-existing regime for trustees in sequestration, the “trust” implications of the appointment as liquidator will be even more clear and well-understood.
Interestingly, the claim against the firm and the associated business was analysed in the light of what is now the practical position: the liquidators are often appointed, not because they have been chosen, personally, but because they are part of a large firm which has the expertise to handle the work involved in the particular appointment. Whilst the appointments are personal, the Judge pointed out that this highlighted what he called: “the gap between theory and reality”. Were the staff carrying out the work for the liquidators the “staff” of the liquidators (thereby, being included in the claim, because the liquidators could not limit liability) or were they the “staff” of the firm (and, in this case, the associated firm) and, therefore, possibly (by virtue of not being part of the “statutory trust” structure) able to rely upon the limitation of liability.
In using phrases such as “in the real commercial world these staff were staff or members of” the firm and “in the real world it appears that the remuneration that was in theory payable to the Former Liquidators was in fact invoiced by” the firm, the Judge was reflecting the fact that the modern world of corporate insolvency is as far removed from that of joint stock companies as the penny farthing is from the Mars rover!
His decision on the limitation of liability clauses was:
“that they are effective to limit any separate liability that [the firm] may have … except that, for the reasons that I have given they are not effective to limit the liability of the Former Liquidators”
On the face of it, therefore, a victory for the firm seeking to limit liability in terms of the engagement. Unfortunately, however, we then enter into the realm of vicarious liability. Could the firm, being able to limit its liability for the acts or omissions of its staff, still be responsible for the acts or omissions of the liquidators. On the information available to the Judge (which he stressed was not sufficiently detailed to allow him to be definite), he took the view that the limitation of liability might be sufficient to cover vicarious liability for the acts or omissions of the liquidators.
The decision was a preliminary to a full trial of whether the acts and omissions complained of were actually negligent, but I would recommend a reading of the full decision for its detailed analysis of the law: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.bailii.org/ew/cases/EWHC/Ch/2025/2316.pdf
Obviously, of course, all Insolvency Practitioners (and their firms) carry professional indemnity insurance and so the decision may appear academic. Bear in mind, however, that PI policies can be found to “under insure” and, in certain circumstances, are capable of being repudiated. If a proposal form refers to a contractual limitation of liability, make sure that the limitation that is claimed is actually enforceable. Also, avoid confusion when engaging a prospective client: make sure that you correctly identify the various “hats” that are worn before and during an insolvency process.
Finally, worry not if the appointment is as Administrator – the decision makes it clear that they act as agents for the company and not as a fiduciary. “Worry not” may be a bit of an exaggeration, there are a number of other issues that would arise. Do consider the position, however, if the cases moves into a Creditors’ Voluntary Liquidation.
I’m now leaving the country for a few weeks to recover from this technical exercise, but I will be happy to review any and all templates of letters of engagement, when I get back!
