Insolvency pre-appointment letters of engagement cannot limit liability

A recent High Court judgment has highlighted that limitation of liability clauses, a common feature in accountancy letters of engagement, are largely ineffective in relation to insolvency appointments.

The Judgment was issued by Mr Justice Thomsell in the case of Pagden & Ors v Fry & Anor [2025] EWHC 2316 (Ch) in dealing with a preliminary issue as part of a wider action. That preliminary issue was succinctly put as ‘Can liquidators or their firms dealing with a members' voluntary liquidation limit their liability?’

While the case is one heard by the Courts in England, the statutory provisions are from UK legislation and the cases cited are likely to be equally persuasive in Scotland and Northern Ireland.

Background

The former Liquidators in the Members’ Voluntary Liquidations (MVLs) 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. 

The action was based upon, among other matters, the sale of certain assets of the Companies during each of the liquidations. It was claimed that the Defendants were liable for what was claimed, in effect, to be negligence in these sales in relation to the value at which the assets were sold.

The claim against the former 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 owed contractual duties, under the terms of the letters of engagement, to the Companies, and/or were vicariously liable for the conduct of the liquidators.

As in common in relation to MVLs, letters of engagement had been entered into in relation to the appointments and related work. The Defendants sought to rely upon the limitation of liability clause in each of the relevant letters of engagement. 

The decision

The decision handed down was that a company could not, by 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 range of stakeholders, members, creditors, etc. Those duties also included statutory obligations which could not be modified, excluded or avoided. The liquidation process constituted a statutory trust about which 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.”

It is unlikely 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.”

The claim against the firm and the associated business was analysed in the light of what is now the practical position: That liquidators are often appointed, not because they have been chosen personally, but because they are part of a particular firm which has the expertise to handle the work involved in relation to the appointment. While 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 far removed from the landscape when the Insolvency Act 1986 was enacted.

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, this does not consider the question of vicarious liability. Could the firm, while 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.

Conclusion

The decision was a preliminary to a full trial of whether the acts and omissions complained of were actually negligent. 

Obviously, 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 the various “hats” that are worn before and during an insolvency process are correctly identified.

While this case involved a liquidation, the issues under consideration will not be directly relevant in an Administration appointment (where often there is also pre-appointment work) as an Administrator  acts as agents for the company and not as a fiduciary. Do consider the position, however, if the appointment exists into a Creditors’ Voluntary Liquidation.

This article was prepared based on a briefing issued by Calum Jones, Kepstorn Solicitors, and used with his permission.