Our team looks at why liquidators cannot contract out of personal liability and what this means for insolvency practitioners in particular.
Introduction
The High Court has confirmed that liquidators cannot rely on contractual caps in their engagement letters to limit personal liability arising from their statutory office. Where a liquidator assumes office, liability flows from statute, not from the retainer agreed with the appointing party. This decision has important consequences for office-holders, creditors, shareholders, and those considering claims against liquidators.
What did the High Court decide?
In Pagden and others v Core VCT Plc and others, the High Court considered whether liquidators appointed in a members’ voluntary liquidation could rely on limitation of liability clauses in their engagement letters.
The court held that they could not. Although the engagement letters sought to cap liability, the liquidators’ duties and potential liabilities arose from their appointment as statutory office-holders under the Insolvency Act 1986. Those statutory obligations could not be overridden or diluted by contract.
It is clear that a liquidator’s liability is rooted in statute, not in the engagement letter.
Why does statutory office matter more than the contract?
Liquidators do not act merely as professional advisers. Once appointed, they hold a statutory office and exercise powers conferred by legislation.
The court emphasised that:
- The source of a liquidator’s authority is statute, not contract
- Duties are owed to the company and, in appropriate cases, to creditors and shareholders
- Liability for breach flows from the office itself, regardless of contractual wording
While engagement letters may govern fees and administrative matters, they cannot redefine the legal nature of the role.
Does this apply only to members’ voluntary liquidations?
The case concerned liquidators in an MVL, but the reasoning is broader.
The principle that liability flows from statutory office applies equally to liquidators appointed in creditors’ voluntary liquidations and compulsory liquidations. The judgment reinforces a general rule of insolvency law, rather than creating a narrow MVL exception. It is all liquidations it covers.
Office-holders should therefore assume that liability limitation clauses will not protect them where claims arise from the exercise of statutory functions.
What types of claims are affected?
This decision is particularly relevant to claims alleging:
- Misfeasance
- Breach of statutory duty
- Negligent exercise of powers
- Improper distribution of assets
- Failures in handling company property
Where such claims arise from acts done in the course of the liquidation, contractual caps are unlikely to provide a defence.
Claimants will be able to pursue liquidators personally, subject of course to proving breach, causation, and loss.
What does this mean for creditors and shareholders?
For creditors, shareholders and potential replacement insolvency practitioners considering action against a liquidator, the decision removes a common perceived obstacle.
- Engagement letters are often relied upon as a deterrent, particularly where they include low liability caps.
- The court has made clear that such clauses do not prevent claims based on breach of statutory duty.
That does not mean claims are easy or automatic. Claimants must still establish wrongdoing. However, the route to recovery is clearer.
What should liquidators and insolvency practitioners do now?
Liquidators should review their risk exposure with realism. Professional indemnity insurance, internal controls, and careful decision-making remain critical.
- What is clear is that reliance on engagement-letter caps alone is unsafe.
- Where decisions carry risk, liquidators should ensure they are properly documented, justified, and taken within the scope of statutory powers.
Early legal advice is essential if concerns arise during the liquidation.
Why this decision matters in insolvency disputes
The judgment reinforces a fundamental principle of insolvency law: statutory office carries statutory responsibility.
For the insolvency regime to function properly, office-holders must be accountable. The court’s approach ensures that accountability cannot be diluted by private agreement.
For claimants, it strengthens confidence in pursuing legitimate claims. For office-holders, it underlines the seriousness of the role.
