High Court Bars Liquidators From Contractually Limiting Liability

What began as routine solvent windings-up of three investment trusts in 2015 has produced a significant ruling on liability limitations in insolvency practice. The original liquidators sold the trusts’ investment portfolios in 2016 to connected entities. Successor officeholders later alleged those transactions were conducted at a substantial undervalue, claiming that the liquidators failed to obtain proper independent valuations, gave insufficient scrutiny to the sales process and assured shareholders that best value had been achieved when it had not. The companies were restored to the register in 2020 to pursue these claims, which are framed as breaches of fiduciary duty.

Proceedings were brought under section 212 of the Insolvency Act 1986, which empowers the court to order compensation from office-holders for misfeasance or breach of duty even after statutory release. Facing multi-million-pound claims, the former liquidators sought to rely on £1 million liability caps contained in their pre-appointment engagement letters.

The defendants argued that Parliament has never prohibited liquidators from limiting liability and pointed to other statutory roles, such as directors and auditors, where specific legislation now bars contractual exclusions. The absence of an equivalent restriction for liquidators, they said, implied that liability caps were permissible. They also drew on older authorities, including City Equitable Fire Insurance Co, where contractual provisions limited directors’ and auditors’ liability for negligence, and contended that section 212 of the Insolvency Act is procedural rather than substantive, meaning contractual caps should remain effective.

Thompsell J was not persuaded. He accepted that the statutory framework does not expressly outlaw liability caps for liquidators, but emphasised that the analysis could not stop there. The decisive factor, he said, is the statutory trust: when a company enters liquidation, its assets are held for statutory purposes under a trust created by Parliament, and the liquidator’s duties flow from that trust. Unlike directors or auditors, liquidators do not simply owe duties to the company as a contracting counterparty, so there is no party with power to release or limit them. Crucially, this means that even if shareholders themselves approved a liability cap, it would be ineffective, since members cannot alter duties imposed by statute. The judge described the statutory trust analysis as the “true basis” for why liquidators cannot contract out of liability.

The ruling was less absolute in relation to the firms with which liquidators are affiliated. Engagement letters can still operate to limit the liability of those firms for their own contractual obligations, and potentially for vicarious liability arising from the office-holder’s conduct. The terms in this case were described as wide enough to cover vicarious liability, though whether that protection applies will depend on how liability is ultimately framed at trial. The effectiveness of any limitation will also be tested against the Unfair Contract Terms Act 1977 at a later stage.

The decision provides much-needed clarity on liability caps in insolvency practice. With the misfeasance claims proceeding to trial, the judgment underlines the importance for practitioners across all types of appointments of maintaining strong professional indemnity cover and robust governance arrangements, which remain their most reliable means of managing personal exposure.

Read the decision.