Case of the week: Insolvency

9 February 2012

Where two companies had been ordered to pay damages and costs, an administrator for those companies was not personally liable for those sums where, although the order identified him as the defendant, it was only in his capacity as administrator and the parties had proceeded at trial on the basis that liability fell on the companies’ estates.

Judgment accordingly

The court was required to determine whether the defendant administrator was personally liable to the claimant firm Wright Hassall after it was instructed on a conditional fee agreement for two companies in administration.

A judge held that liability was established with damages to be assessed and Wright Hassall to be awarded its costs, and named Morris, as administrator for the companies, as the defendant in his order.

Wright Hassall submitted that the order made Morris personally liable; the fact that he was referred to as the administrator was irrelevant.

Judgment accordingly

An insolvency office holder acted on behalf of an insolvent estate, and therefore the question arose of whether he was doing so as agent for the estate, which was a separate legal person or entity, or on his own behalf.

For a trustee there was no such question because a trust had no separate legal personality, and therefore legal responsibility for the trustee’s actions fell on him personally. The principle developed by the courts that a liquidator was personally liable for costs in an action that he had brought was a rule of policy which made him personally liable for such costs, notwithstanding that he had brought the proceedings

as agent for the insolvent company, because he had imposed the obligation to incur those costs on his opponent.

It was equally clear that a liquidator was generally not personally liable for costs where he was made the defendant to proceedings arising out of his acts as office holder.

An administrator’s powers were statutory as set out in the Insolvency Act 1986, which states that the administrator did not normally incur personal liability

for obligations he entered into.

While the fact that an obligation was entered into by someone acting as agent did not necessarily exclude their personal liability, that was the general position for contractual obligations.

It followed that, where litigation was commenced against an administrator arising out of contractual obligations said to have been entered into by him as administrator, the cause of action would generally be against the company and not him.

Naming Morris as the administrator recognised that he was being sued as an agent rather than in a personal capacity with the effect that, far from being by default an action against him in a personal capacity, the implication was the other way and it would be necessary for the firm to plead specifically that personal liability was alleged.

The description of Morris as the defendant in the claim and the order did not by necessary implication indicate personal liability for damages or costs under the order. In referring to Morris as party to the agreement, the judge was not deciding on whether he was a party in a personal or representative capacity. Since the common basis on which the parties had proceeded was that liability fell on the companies’ estates, that was the effect of the order. Morris was not personally liable under it.

Commentary

Thomas Blackburn

The judgment found that where the trial judge’s order does not state whether the administrator or the company in administration should pay the costs of the action that they defended and lost, Cooke J found it did not impose personal liability on the administrator but only on the estates of the companies in administration. Although this decision was case-specific, it does raise issues.

First, when attending a trial, take a moment to consider costs: if you are successful, what costs order do you want? If you are unsuccessful, what is the best result, costs wise, your client could hope for? With the recent Court of Appeal decision in Simcoe, everyone should also be thinking about interim payments being ordered/agreed at the conclusion of trials: a judgment rate interest of 8 per cent should be more than an afterthought.

Second, had the insolvency practitioner in this case been found to be jointly – and personally – liable for the costs, he faced a considerable bill. It did not happen here, but that is not to say it cannot happen. This case dealt with the issue of silence surrounding the issue in the judgment. Submissions could have been made to the trial judge should the successful party wish the insolvency practitioner to be jointly liable for the costs incurred in the case.

Finally, note that the companies in administration in this case cannot afford to pay the winning solicitors’ fees. The solicitors, having acted on a conditional fee agreement, have been successful yet will not be paid (as far as is known). Consideration of whether the paying party can actually pay will be on their minds in future.

Thomas Blackburn, national advocacy manager, Just Costs Solicitors

For the appellant

Stephen Davies QC, Guildhall Chambers

Laura Heeley, Monckton Chambers

Wright Hassall

For the defendant

Avtar Khangure QC, St Philip’s Chambers

Robin Koolhaven, partner, KW Law