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Personal liability of Insolvency Practitioners

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The decision from the High Court came in relation to Wright Hassall LLP v Morris(1) 

Mr Morris (“the Defendant”) was the administrator of two companies (“the Companies”) who themselves were involved in litigation proceedings as defendants. The claim against the Defendant was brought by Wright Hassall LLP (“the Claimant”), the firm of solicitors who had agreed to represent the Companies.

The Claimant and the Companies had entered into two conditional fee arrangements (“CFAs”): one for the initial advice given, and one for conducting the litigation. In 2009, following the conclusion of litigation involving the Companies, the Claimant issued a claim form for unpaid invoices against “Mr Duncan Roderick Morris, theAdministratorof [the companies]”. The Defendant pleaded in his defence that the contract had been made with the third parties and not with him personally.

On the issue of the enforceability of the CFAs, the Court found in favour of the Claimant. Liability was established, with damages to be assessed, and the Claimant was to be awarded its costs. The order was made naming “Mr Duncan R Morris (Administratorfor [the Companies]” as the defendant.

The Companies did not have sufficient assets to satisfy the order, and the Claimant issued fresh proceedings against the Defendant in his personal capacity. They argued that the Defendant should be personally liable, and the fact that he had been referred to as the administrator for the Companies was irrelevant.

Further the Claimant argued that an analogy should be drawn between the position of an Insolvency Practitioner and that of a trustee. Trustees are personally responsible for contracts entered into in the execution of a trust, and therefore are personally liable even if sued as trustee. The Court rejected this argument on the basis that a trust has no separate legal personality and therefore a trustee is personally liable for obligations entered into, whereas an insolvent estate is a separate legal entity and can therefore be represented by an agent.

The Court concluded that, in general, where litigation is brought against an administrator arising out of contracts entered into by him as administrator, the cause of action lies against the company only. An administrator’s powers are set out in the Insolvency Act 1986, which provides that when exercising their powers under this act the administrator of a company acts as its agent. This principle contained in the Insolvency Act 1986 means that an administrator will not normally incur personal responsibility for obligations entered into. This is a general rule and the fact that an obligation was entered into by someone acting as an agent does not necessarily exclude their personal liability. On the facts of the case it was evident that the common basis on which the parties had proceeded was that the Defendant was acting as an agent.

Considerations

Insolvency Practitioners who may have feared potentially facing considerable bills will meet the outcome of this case with relief as the Court has maintained their protection against costs orders in litigation brought against them. However, the outcome of the decision was to a certain extent case-specific and there are no guarantees that personal liability will be avoided if it appears from the facts that both parties had proceeded on the basis that there would be personal liability. Although the lack of a disclaimer against personal liability will certainly not indicate definitively that the parties intend that there should be personal liability, it may be something that you should consider making clear in negotiations or the agreement itself.

The outcome of this case does not affect the general principle developed by the courts that an Insolvency Practitioner may be personally liable for costs in an action that he brings acting in this capacity.

For additional information please contact Justin Emerson of Gepp & Sons on 01245 228113 or emersonj@gepp.co.uk

The above is not legal advice; it is intended to provide information of general interest about current legal issues.

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