The insolvency regime in the UK has been a very newsworthy topic since the financial crisis began in 2008. Stories of the demise of household names on Britain’s high streets have become all too frequent. The role of an insolvency practitioner in attempting to rescue a company has also been well publicised – Portsmouth Football Club anyone? Their exercising their functions on behalf of a company is set out under paragraph 69 of the Insolvency Act 1986 (“the Act”) and states that they do so as the company’s agent.
The recent Court of Appeal case of Wright Hasall LLP v Duncan Morris (Administrator of Marketbalance Ltd & Phoenix Insurance Management Limited) highlights the problems insolvency practitioners face in their role as administrators of a company or companies.
By way of background an administrator is a licensed insolvency practitioner. Once appointed the administrator acts as an officer of the Court and therefore has a duty of fairness to creditors of the company as a whole. The administrator is required to set out in their proposal to creditors what statutory purpose they intend to follow under paragraph 3, Schedule B1 of the Act.
As a general rule where a person enters into contractual obligations as an agent, and this fact is disclosed to the other party, generally the agent will not be held personally liable under the contract unless the terms of the contract on a true construction provide otherwise.
Briefly the facts in Wright Hasall were prior to the administrator’s appointment an insurance provider issued legal proceedings against two companies. The administrator was subsequently appointed over the companies and instructed a firm of solicitors Wright Hasall LLP (“WH”) to defend the claim.
The administrator and WH entered into two conditional fee arrangements (“CFAs”). The CFAs were signed by the administrator in his capacity as administrator of the companies but without any express qualification about whether they would be personally liable for WHs fees under the CFAs.
After the litigation settled WH issued proceedings against the administrator claiming their unpaid fees and disbursements.
The claim form referred to Mr. Morris as the administrator of the two companies, and the defence’s response referred to Mr. Morris in the same way. WH succeeded in its claim before the High Court but it was held that the administrator was not personally liable to WH under the CFAs as whilst the claim identified him as the defendant it was only in his capacity as administrator. The liability was that of the companies and not the administrator personally. WH appealed this decision.
On appeal the Court of Appeal held the administrator was personally liable for WH’s claim because the administrator was the only named defendant in the contract claim and so judgment therefore could not have been made against the companies over which he acted as agent. The parties to the litigation seemed to have proceeded oblivious to the question of who was actually the defendant before the Court.
The fact the administrator was sued as administrator of the companies didn’t support the view they were sued as agent for the companies rather than in their personal capacity.
This case highlights the importance of correctly identifying the parties to a claim. That the administrator was the only named defendant, even though they were named “as administrator of A Ltd”, meant that they could only be the person liable for the debt.
Although the agency rules under the Act still apply to administration appointments this case serves as a reminder to all administrators that if they wish to avoid personal liability to contracts then it should be expressly excluded.
In addition when an administrator is involved in litigation, if they intend to submit that they are not personally liable, they should seek to be substituted by the insolvent company as defendant to mitigate any risk they are found personally liable.
About the writer, Tarnjit Grewal is a solicitor in the Commercial Department at Hanne & Co. Tarnjit has completed Certificate of Proficiency in Insolvency and has part-completed the JIEB.
If you are an insolvency practitioner and would like specialist advice in this area of law please do contact Tarnjit Grewal in our Commercial Law Team on 020 7228 0017 or by emailing us at email@example.com