To sign or not to sign? How a solicitor’s uplift became a liquidator’s downfall

June 25, 2015

A recent High Court decision left a liquidator personally liable under a contract entered into in the course of his appointment – illustrating the importance of getting the wording of the contract right before it all goes wrong.  As you’ll see, this decision is also relevant for directors, officers and other agents who enter into contracts on behalf of companies.

It is settled law (going back to the 19th century) that where a liquidator enters into a contract in the course of his appointment, the starting point is that he contracts on behalf of the company rather than in his personal capacity.

It is now clear from the High Court judgment in Stevensdrake Ltd v Stephen Hunt & Others (20 May 2015) that that is indeed only the starting point.

In this case, Mr Hunt was appointed as liquidator to a company which had been in administration.  Alleging misfeasance, he issued proceedings against the former administrators under s. 212 of the Insolvency Act 1986. Stevensdrake Limited, a firm of solicitors, were instructed by him to conduct the misfeasance action.

It seems to have been envisaged by everyone in correspondence that the costs of the action would be recovered from the assets of the insolvent company, and would be limited to the insolvent estate. A conditional fee agreement was signed between Stevensdrake and Mr Hunt (“CFA”). The CFA itself was deceptively brief (a page and a bit), and provided for a 100% uplift if the claim against the former administrators succeeded (“success fee”).

The CFA also had some schedules, which is where the technical terms lurked.  One included a definition of “success”, while another warned Mr Hunt: “You are personally responsible for any payments that you may have to make under this agreement.  Those payments are not limited by reference to the funds available in the liquidation.

Eventually, the claim against the former administrators was settled out of court. The defendants agreed to pay, in aggregate, over £2 million – which fell under the CFA’s definition of “successful”.  A respectable result, and Stevensdrake were entitled to their uplift.

Unfortunately for Mr Hunt, one of the defendants then went bankrupt and failed to pay as agreed. This left a massive shortfall between the funds available to the liquidator and Stevensdrake’s bill, which included the uplift and disbursements (such as Counsel’s fees, which Stevensdrake had had to pay out of their own pocket).

Stevensdrake therefore sued Mr Hunt personally for the balance of their bill, a little shy of £1 million, based on the clear wording of the CFA schedules.

At the High Court hearing, Mr Hunt’s barrister deployed every possible argument to extricate his client from the CFA that had been signed. He even tried to convince the court that the phrase “personally responsible” did not mean “personally liable” – which, in the Judge’s view, “appeared to lack reality”.  He also argued that, as a matter of principle, a liquidator could only contract on behalf of the company to which he was appointed, and therefore the proper client was the company in liquidation, not Mr Hunt himself.

The case turned on the particular contractual provisions in question. “Whatever the starting point,” – said the Judge, – “the plain words of the schedule cannot be ignored.” In the eyes of the law, Mr Hunt was found to have assumed personal liability when he agreed the terms in the schedule. No correspondence (before or after the CFA) could override the signed document.

Needless to say, one may feel some sympathy with Mr Hunt’s predicament, but this result is hardly surprising.  Commercial certainty requires the parties’ obligations to be readily understood, and the words of the contract are thus read objectively, according to their natural meaning. This is especially so in an insolvency context, where risks are heightened for all concerned.   Liquidators cannot claim some special exemption in this respect.

The Stevensdrake decision will also have relevance for directors, officers and other agents who enter contracts on behalf of companies (or anyone else). It is not unusual for a director to be required to give a personal guarantee of his company’s obligations. Any such contract must be carefully reviewed and negotiated to ensure that personal liability, or some other adverse term, is not accepted inadvertently.

What, then, for the hapless liquidator, who is left with a personal bill approaching seven figures, after an apparently successful action? Mr Hunt is now suing Stevensdrake for not advising him of the full extent of his liability under the CFA.  But that is only because there is an arguable case (in Mr Hunt’s instance, still to be decided) for saying that where the contract is with one’s own legal advisers, even where one is a “sophisticated” client one may be entitled to have the meaning and effect of certain terms specifically drawn to one’s attention.  Another recent case, O’Brien v MIB (12 June 2015) may give him hope, highlighting as it does the role of solicitors in influencing and guiding their clients (the consumers) in the interpretation and proposed operation of CFAs.

For the rest of us, it remains essential to read any agreement which one is asked to sign (with schedules!), to make sure what is written there reflects the parties’ full understanding, and if necessary, run it past a lawyer before signing on the dotted line.