HHJ David Cooke:
- By application notice dated 2 November 2011 the applicant firm of solicitors seeks various forms of relief against the respondent, who is an insolvency practitioner and their former client. The issues between the parties stem from separate proceedings (claim number 9BM40021) in which the solicitors sued for their fees pursuant to two conditional fee agreements pursuant to which they had advised and acted in litigation between the two companies in administration and third parties. That claim came to a trial on 27 April 2010 before His Honour Judge Brown QC, at which the solicitors obtained judgment for their costs arising under the CFA's (in the form of damages to be assessed by a costs judge; the bill as drawn amounts to approximately £135,000) together with the costs of that claim, agreed at £74,000. HHJ Brown QC's order to that effect is in the bundle at page 278.
- At the hearing before me, it was apparent that the parties were at issue as to whether the effect of that order was to impose a liability on Mr Morris personally, or upon the estates of the two companies in administration. If the latter, it is apparent that the companies have insufficient assets to discharge the amount of the judgment and the solicitors seek various orders the effect of which will be to require Mr Morris to contribute to the assets to make good alleged misfeasance is on his part and/or to make him personally liable. They also seek an order for Mr Morris' removal as administrator.
- After hearing submissions from both counsel, I gave my decision that the effect of the earlier order was only to impose a liability on the estates of the companies, and said that I would give written reasons for that decision in due course. In consequence, the parties agreed some of the relief sought, and that the rest of the application should be adjourned. I gave a direction extending the time for applying for permission to appeal against my decision until the reasons were handed down. These are those reasons.
- I must first set out some background as to the previous claim, and the circumstances that gave rise to it. In October 2008 Mr Morris was approached with a view to taking appointment as administrator of the two companies. At that time, they were embroiled in litigation with a company called Haven Insurance Co Ltd, which alleged that the companies had wrongfully retained substantial amounts of insurance premiums which ought to have been paid on to Haven. Haven had obtained an order freezing all the assets of the companies up to the value of £1.5 million. There would be little or nothing by way of assets in the administrations unless they were successful in obtaining the release of these funds.
- Mr Morris in turn approached various firms of solicitors to consider whether they would act in the litigation, and for their view as to the prospect of success. Wright Hassall indicated that they would be prepared to do so, and offered to enter into two CFA's, one to cover their initial advice and the other acting in the litigation. In due course, Mr Morris was appointed and engaged Wright Hassall to act. The CFA's were entered into shortly afterwards; they take the form of two letters at pages 39 and 46 respectively in the bundle each of which:
i) is addressed to "Mr D Morris, the Redfern Partnership…"
ii) commences:
" Dear Duncan
Haven Insurance Co Ltd v (1) Market Balance Ltd (in administration) and (2) Phoenix Insurance management limited (in administration)
Conditional Fee Retainer Letter with Success Fee "
iii) described the work to be done by reference to the proceedings instituted by Haven against the two companies, and
iv) was signed by Mr Morris in a box containing a typed acknowledgement that he accepted the terms of the letter, but which did not contain any disclaimer of personal liability, in contrast to the manner of execution of other documents, including those prepared by Wright Hassall, which invariably stated that they were executed "as administrator and without personal liability".
- In due course, the litigation concluded with a settlement agreement, but the solicitors were not paid and a dispute arose. The solicitors issued an ordinary Part 7 claim form on 4 March 2009, initially naming the defendant as "Mr Duncan Morris… and Mr Timothy Heaselgrave… together trading as the Redfern Partnership (a firm)". The Particulars endorsed on the claim form referred to two invoices, each of which was addressed to the Redfern Partnership.
- This attracted a defence on behalf of Mr Morris (page 128) which pleaded his appointment as administrator of the two companies and that the solicitors were "retained by the First Defendant in his capacity as Administrator of the Companies. It is denied that the Claimants were retained by the Redfern Partnership or by the Second Defendant. The Claimants at all times acted for the Administrator of the Companies". At paragraph 15 of that defence it was pleaded that "the First Defendant denies the claim in its entirety insofar as it seeks to claim against the Redfern Partnership and its individual partners. Insofar as the claim purports to be a claim against the First Defendant as Administrator of the Companies, the First Defendant admits that the Claimant was retained to undertake work for each Company in Administration but denies that the sums claimed are properly due and seeks an amount of such sums determined by the Court to be properly due in each of the Administrations…".
- Correspondence at the time made clear Mr Morris' position that the CFA's were entered into by him as administrator of the two companies and not in a personal capacity, and that Mr Haeselgrave and the Redfern Partnership had no involvement (see for example page 134).
- On 24 July 2009, Wright Hassall amended their claim form (p126) apparently in response to these aspects of the defence. The amendments included the following:
i) the defendant was named as "Mr Duncan Roderick Morris, the Administrator of Marketbalance Ltd and Phoenix Insurance Management Limited". References to Mr Heaselgrave and the Redfern Partnership were deleted
ii) the claim was described as being for work done on behalf of "Mr Duncan Roderick Morris in his capacity as Administrator of Marketbalance Ltd and Phoenix Insurance Management Limited"
iii) credit notes were issued to cancel the original invoices, which were replaced by new invoices addressed to "Mr Duncan Morris- Administrator of Marketbalance Ltd and Phoenix Insurance Management Limited", and the particulars of claim were amended to refer to the new invoices.
- There was then an amended defence and counterclaim (p142), para 1 of which said:
"Save that it is admitted that a retainer was entered into between the Claimant and Marketbalance Ltd and Phoenix Insurance Management Ltd ("the Defendants") for the reasons set out below it is denied that the Claimant is entitled to the sums claimed in the Particulars of Claim"
- This therefore took the stance that the contract was made with the companies and not Mr Morris personally, going so far as to adopt the internal definition of "the Defendants" as referring to the corporate entities rather than Mr Morris in his personal capacity, or even in his capacity as office holder. The rest of the pleading set out the grounds of defence against the claim, which in summary were
i) That the solicitors had misrepresented the CFA's as being 'standard CFA's'
ii) The solicitors had failed to provide adequate particulars in their invoices or to break down the work done between the two companies
iii) No fees were due as 'success' as defined in the CFA's had not been achieved
iv) The solicitors had negligently allowed the Administrator to enter into settlement agreements which by virtue of certain terms included in them would be unlikely to result in any recovery in the insolvencies.
- There was thus a point made as to the correct identity of the client as party to the contracts of retainer, and then a set of issues relating to the binding effect of the CFA's on that party.
- In their Reply (p152) the solicitors by way of introduction in para 2 said "references herein to 'Mr Morris' are used interchangeably with 'the Defendants' where the context requires", and then set out their account of the circumstances and contentions as to the 'binding effect' issues. The Reply does not in terms address the 'identity' issue. It certainly did not plead that Mr Morris undertook personal responsibility when entering into the CFA's.
- In due course, the matter came on for trial before HHJ Brown QC. None of the counsel appearing before me was involved, the solicitors being represented by Mr Nicholas Bacon QC and the defendant by Mr Paul Burton. I have a transcript of the hearing (p184) and of the judgment (p271) leading to the order I have referred to. The judge heard submissions by Mr Bacon that he could deal with the matter summarily as nothing in the Defence was capable of amounting to a defence to the claim. In the course of a response by Mr Burton he indicated that Mr Burton's clients might face adverse findings of fact if the trial proceeded to evidence, following which, on instructions, Mr Burton withdrew part of the defence, saying this (p244):
" The companies are going to discontinue their defence to this claim in the sense of challenging the limited CFA's…That is expressly to preserve and leave open all other arguments, the construction clause [sic, sc 'point'] in a construction of the success clause, the super priority point and the pre- admin cost point… to the judge dealing with the assessment…my understanding is the court must really today just effectively be considering the validity of the CFA's and our client under misrepresentation. So that is being continued."
- The judge then delivered a judgment in which he considered and rejected the defence insofar as it raised the 'binding effect' points, holding that liability was established under the contract for damages to be assessed by a costs judge. He did not in terms address any issue as to the identity of the contracting party. The form of order, which was agreed between counsel, is in those terms. It names the defendant as "Mr Duncan R Morris (Administrator for Marketbalance Ltd and Phoenix Insurance Management Limited)", which is slightly but not materially different from the formulation used on the amended Claim Form, as set out above.
- Mr Davies' primary submission is that the order is made naming Mr Morris as defendant and is therefore a personal liability of his; the reference to his position as administrator being irrelevant. It has not been appealed, and it is not open to Mr Morris now to characterise the liability as that of the companies in administration so that the claimant is at risk of insufficiency of assets in the estate. He referred me to Mulkerrins v PriceWaterhouseCoopers (a firm) [2003] UKHL 41 for the proposition, I think uncontroversial, that a point decided in litigation may not in general be relitigated between the same parties in later proceedings.
- All of this, it seems to me, turns on whether the starting point is correct, and an order made against "Mr Duncan R Morris (Administrator for Marketbalance Ltd and Phoenix Insurance Management Limited)" is an order against Mr Morris personally. If it is, either because the identification of the defendant in that manner necessarily imports personal liability, or (if ambiguous as to whether it does so) the order was made on a common assumption between the parties or after a judicial finding as to personal responsibility, the remainder follows. If neither of these is the case, the issue of personal liability has not been determined as between the parties and remains potentially open.
- On the first point, which is of some general importance because it is very common to have proceedings brought against an insolvency office holder in which he is named by reference to his office, Mr Davies drew an analogy with liability of a trustee, who is in general personally responsible for contracts entered into, or torts committed, in the execution of a trust, and would be personally liable in respect of any order made against him even if he had been sued "as trustee of the X Trust". Further, he said, an insolvency office holder is personally liable for an adverse order for costs in proceedings he initiates; referring me to the analysis of the common law position in the Australian case, Hypec Electronics Pty Ltd (in liquidation) v Mead and others [2004] NSWC 731, drawing the distinction between the question whether an office holder is personally liable for costs and whether, if so liable, he has a right of indemnity out of the estate. A passage is cited from Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285 in which Oliver J said:
"I think that a review of the authorities does disclose that a clear dichotomy between the case where the liquidator is sued and the case where the liquidator initiates proceedings, is established, and indeed it seems me to be a perfectly reasonable one. I cannot at the moment see why it should be contended that a liquidator who takes it on himself to institute proceedings, to bring parties before the court, to subject them to costs, and as against whom it is quite clearly established that no order for security can be made, should then be entitled to plead that he is not responsible beyond the extent of the assets in his hands. I can see no reason at all why a liquidator should be entitled to an immunity which is not conferred on other litigants. A trustee or a personal representative who institutes proceedings no doubt has a right to indemnity out of the estate which he represents but, if he litigates, he litigates at his own risk and so, in my judgment, it should be with the liquidator…"
- I do not accept the analogy with the position of a trustee. An insolvency office holder acts on behalf of an insolvent estate, and the question therefore arises whether he is doing so as agent for the insolvency estate, which is a separate legal person or entity, or on his own behalf. In the case of a trustee, there is no such question because a trust, as such, has no separate legal personality. Legal responsibility for the trustee's actions therefore necessarily falls on him personally, and there is only one question to be asked, whether he is entitled to indemnity from the trust assets, which is a matter between him and the beneficiaries which does not involve the claimant.
- The principle developed by the courts that a liquidator is personally liable for costs in an action he brings is a rule of policy which makes him personally liable for such costs notwithstanding that he brings the proceedings as agent for the insolvent company, because it is he who imposes on his opponent the obligation to incur those costs. It is equally clear from the authorities that a liquidator is in general (and in contrast) not personally liable for costs where he is made defendant to proceedings arising out of his acts as office holder. In Wilson Lovatt Oliver J went on to say:
"I can quite see that there may be very powerful reasons of policy for a rule that a liquidator, when carrying out his functions and thus subjecting himself to the possibility of proceedings against him by parties who are discontented with the way in which he has carried out those functions, must be entitled to defend himself without being subjected to the risk of having costs awarded against him personally, because of course he cannot protect himself against claims being made. Unless there were some such rule it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies. It seems to me that it is quite a different matter where the liquidator himself takes it on himself to institute proceedings… "
and in Re London Metallurgical Co Ltd [1895] 1 Ch 758 at 763 Vaughan Williams J said that the general rule was that the costs of parties successfully suing a liquidator were to be paid out of the assets of the company "though under exceptional circumstances an order may be made going beyond that and giving them the right to be paid by the liquidator personally".
- An administrator's powers are statutory; they are set out in paras 59 and 60 of Sch B1 to the Insolvency Act coupled with Sch 1. Para 69 of Sch B1 provides that "In exercising his functions under this Schedule the administrator of a company acts as its agent". The principal purpose of this provision is evidently to seek to ensure that in so doing the administrator does not normally incur personal liability for obligations entered into; see eg Sealy & Millman: Annotated Guide to the Insolvency Legislation, note to the similarly worded predecessor provision in s14(5). It is true as Mr Davies submitted that the fact that an obligation is entered into by a person acting as agent does not necessarily exclude personal liability of the agent, but that is the general position for contractual obligations where the agency is disclosed, unless the terms of the contract on a true construction provide otherwise, see Stewart v Engel [2000] BCC 741 to which he referred me. There is no question that the agency was known to the solicitors in this case.
- It follows that where as here litigation is commenced against an administrator arising out of contractual obligations said to have been entered into by him as administrator of a company, the cause of action will in general be one lying against the company and not the administrator. In such circumstances it seems to me that naming the defendant as an individual "as administrator of X Ltd" recognises that he is sued as agent rather than in a personal capacity, so that far from being by default an action against him in a personal capacity, as Mr Davies submits, the implication is the other way, and it would be necessary for a claimant to plead specifically that personal liability was alleged, if that be the case. I am not concerned today with claims arising otherwise than in contract, such as tort claims under which an individual may be personally liable even if acting in a representative capacity. Further, when a costs order is made in such a case, the implication from the title to the action is reinforced by the rule that the office holder as defendant is not personally liable for such costs unless the court has, exceptionally, ordered that he should be.
- I conclude then that the description of the defendant in this case in the claim and the order do not by necessary implication indicate personal liability under the order, either for the substantive relief (damages) or the costs of the action, and it is necessary to examine whether the making of the order resulted from a judicial finding of personal liability, express or implied, or was made on a common assumption by the parties that Mr Morris would be personally liable. I am entirely satisfied in this case that it did not.
- Mr Davies referred me to a number of passages in HHJ Brown QC's judgment which he said supported the contention that the decision was made on the footing that liability was personal, in particular:
i) Para 8 at p 273: "The issue therefore is squarely one of contract between Wright Hassall and Mr Morris of the Redfern Partnership…"
ii) Para 11 at p 274: "… this… is the contractual document that governs Mr Morris and Wright Hassall…"
iii) Para 12 at p 275: "… what is now being said is that there are some provisions of the Insolvency Act [as to priority of expenses] which take some precedence here but in my judgment those are really neither here nor there so far as the contractual arrangements are concerned between Wright Hassall and Mr Morris – he is the one who has agreed this particular matter. It may well be that he has difficulties in his administration, but frankly that is going to be his problem and not that of Wright Hassall."
- The last passage it seems to me is the strongest point in Mr Davies' favour, since it clearly suggests that HHJ Brown QC was of the view that any insufficiency of assets in the administration would affect Mr Morris and not Wright Hassall. But having read the transcript and the judgment as a whole, it is in my view clear that this was not an issue that was considered by the parties to be a live one before the judge, so that there was no argument on it and the passages I have referred to cannot be taken as reflecting a decision on the judge's part. On the contrary, it is clear in my view that the case proceeded before HHJ Brown QC on the footing that liability would fall on the estates of the companies in administration.
- Mr Khangure relied on many matters in support of his submission, which in my view collectively point firmly to the conclusion above. I will not list them all, but it is sufficient to set out the following:
i) As a starting point, the claim is in respect of contracts entered into by the administrator in the exercise of his functions, in the statutory capacity of agent for the company. On normal agency principles, he is not personally liable unless the contract provides otherwise. There is no express provision to other effect, and although the contract does not contain the normal specific exclusion of personal liability, the absence of an exclusion clause is not in itself an indication that personal liability is intended. I would in any event be reluctant to draw an inference in favour of solicitors arising from the absence of an exclusion in a contract drafted by them, where there is no evidence of specific agreement on the point and the same solicitors clearly regarded it as their duty to insert such an exclusion when their client was dealing with third parties.
ii) In response to the initial defence the solicitors re- issued their invoices and amended their claim to refer specifically to Mr Morris's representative capacity and drop claims against his business partner, who was not a joint administrator of the two companies. This strongly suggests that they accepted that Mr Morris was not liable in a personal capacity, since if he had been there could be little doubt that his partner would have been jointly liable.
iii) Thereafter, and particularly at the trial, the claim proceeded on the tacit basis that Mr Morris was not personally liable. That position was clearly stated in the amended defence, not specifically disputed in the Reply and not contested at the trial. At no point was any issue as to personal liability raised before the judge, and the course of the hearing makes it clear, in my view, that the claimant's counsel did not regard it as a live issue.
a) Mr Bacon QC for the claimant opened the case to the judge by submitting that it could be dealt with on a summary basis. He described the defence thus (p186) "… paragraphs 1-6 set out the chronology. And then the guts of the pleading… at paragraphs 7, 8 and 9. This is on the substantive issue whether the CFA is binding or not." Paragraph 1 of the defence of course pleaded that the retainer was between the solicitors and the companies. Mr Bacon took no issue with that, treating it as uncontroversial "chronology". Paragraphs 7-9 dealt with what I have referred to as the 'binding effect' issues as distinct from the 'identity' issue, and it was on these that subsequent argument focussed.
b) At p 192-3 Mr Bacon refers to the objection that there is no apportionment of fees between the two companies, clearly accepting that it is necessary but (adopting the judge's comment) said that this would be dealt with at the assessment, so that two "costs certificates" would be produced and "there's absolutely no risk of funds being used by one company to discharge the fees of another". If Mr Morris were personally liable, the solicitors would not be concerned as to whether he was able to recover from the assets, or how he apportioned the cost between the two companies.
c) At p 220 Mr Bacon referred the judge to issues of priority of expenses in administration, which again could only be relevant to the claimant if they were limited to the assets of the estate
d) The same issues were discussed between counsel from p 246, with no suggestion that they were irrelevant to the claimant. In the following passages Mr Bacon raised an argument that the terms of the CFA's entitled the solicitors to a greater degree of priority than normally given by the Insolvency Rules (referred to as 'super priority'), by implication emphasising that the claim was against the estate assets and seeking to forestall an argument that the claimant be paid pari passu with other expenses
e) As to the issues that were live before the judge and could not be dealt with by a costs judge, they were identified by Mr Burton at p 194: "… one of the issues that must be resolved my lord must be the validity of the CFA's…", with which Mr Bacon agreed at p 196: "So really the only live issue… is that the CFA's are not binding."
iv) Against that background, HHJ Brown QC gave his judgment, beginning by setting out the issues he was deciding (para 7, p 272) "The substance of the defence is contained within paragraphs 6-10." He did not consider paragraph 1 of the defence which pleaded the 'identity' point, because no issue about it had been taken before him.
- In those circumstances, it is in my view clear that in the passages in which he refers to Mr Morris as party to the contract he is not deciding (either way) any question as to whether he was party in a personal or representative capacity, and insofar as he implies that problems of insufficiency of assets affect Mr Morris and not the solicitors, that does not reflect a decision on personal liability that he was not asked by the parties to make. However, since in my view the common basis on which the parties proceeded before the judge was that liability fell on the estate, that is the effect of the order that was made.
- Mr Khangure also made a number of submissions to the effect that the forms of relief sought on the application before me are in any event impliedly premised on liability under the order falling on the estate. I see force in those submissions, but I do not need to deal with them individually since the application of course post- dates the order and questions of the effect of the court's order do not turn on the view taken by one of the parties after it was made.
- For the reasons set out above, which are matters of interpretation of the effect of the order made and not altering that effect (which could only be done on appeal) I hold that HHJ Brown QC's order does not impose personal liability on Mr Morris but only on the estates of the two companies. To the extent that the parties are unable to agree the position as regards priority within the insolvent estates, I will deal with that at the adjourned hearing.
