The case of Pagden & Others v Core VCT Plc & Others concerned the question of whether liquidators or their firms dealing with a members’ voluntary liquidation (MVL) can limit their liability in their terms of engagement. Whilst this case concerned an MVL, the High Court’s decision has more wide-ranging implications for insolvency practitioners and their firms.
Case Background
This case arose in the context of three MVLs where the liquidators’ firm included limitation clauses in their engagement letters attempting to cap their liability at £1 million. After the companies were restored to the register with new liquidators, the claimants brought a claim against their former liquidators and the former liquidators’ firm. The claimants alleged that the defendants had breached their fiduciary, tortious and contractual duties and were therefore liable for the losses and damage incurred.
The High Court was asked to decide a preliminary issue as to whether liquidators and/or their firms can limit their liability in their terms of engagement. Perhaps surprisingly, there was no previous case authority on this point and so it was the first time the High Court had to grapple with this issue.
The defendants argued that they were protected by the limitations contained in their terms of engagement. The claimants argued that no such protection applied on the basis that:
- The law makes no provision for shareholders or the Court to limit the liability of a liquidator and the extent of their duties is a matter of law, not of any contract
- Liquidators are fiduciaries administering a statutory trust and the statutory trust does not provide for limitation of liability
- Limiting liability would be an attempt to oust the jurisdiction of the Court
- No limitation could be agreed by the directors alone
- On a true construction of the liquidators’ terms of engagement, they did not provide for the limitations of liability to extend to the former liquidators or any of the defendants who might be liable for anything done by the former liquidators
- The limitation clause was rendered invalid by the provisions of the Unfair Contract Terms Act 1977 (UCTA).
The Court's Decision
The Court ruled that:
- Liquidators’ engagement terms cannot limit liability for breaches of statutory duties.
- Liquidators act as fiduciaries holding assets under a statutory trust, which must be administered according to statute.
- These fiduciary obligations cannot be waived or altered by the company, acting through its directors or shareholders.
Notwithstanding the above, the Court did indicate that the limitation clauses may still protect the liquidators’ firm and other staff members in respect of certain types of claims. However, the Court noted such limitations may still be invalid in accordance with the provisions of UCTA.
Practical Takeaways
Given the Court’s decision in this case, liquidators should not rely on liability caps in relation to their conduct as liquidator. Even if agreed pre-appointment with a company’s directors and/or shareholders, a cap is unlikely to protect an office-holder once appointed.
Liquidators should review their engagement letters. Properly drafted engagement letters can cap the firm’s exposure and potentially its vicarious liability in respect of staff assisting with liquidation matters provided the work falls within the scope of the services to be carried out and takes into account the provisions of UCTA.
In law, the office holder acts personally but in practice a lot of the work is carried out by staff members and invoices are raised in the firm’s name. The Court recognised this commercial reality and read the engagement accordingly, but still did not extend protection to the liquidator’s own liability.
The Court noted that liquidators can seek directions from the Court on difficult issues and regulatory insurance and bonds exist to protect liquidators. These remain tools available to office-holders in order to mitigate risk.
A full copy of the Court’s judgment is available here.
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Vicky Biggs
Legal Director
Vicky is a Legal Director in the Insolvency and Restructuring team at Myerson and has been with the firm since 2012. Utilising her commercial litigation experience, Vicky now specialises in contentious insolvency matters, advising insolvency practitioners, directors and individuals in relation to both corporate and personal insolvency issues.
Vicky advises on a wide range of insolvency matters, including claims made by administrators, liquidators and trustees in bankruptcy, director disqualification proceedings, remuneration approval applications, retention of title claims, validation orders, bankruptcy annulment applications and winding-up and bankruptcy petitions.
About Vicky Biggs