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Overview Of Does A Liquidator Have A Duty To Litigate

It might be a brave Insolvency Practitioner who said there is no Liquidator duty to litigate. Others might suggest it wouldn’t be bravery but such a proposition might come perilously close to perversity.

The world wide web is full of articles looking into dilemmas that try to answer questions that have no definitive answer and perhaps frustratingly littered with conclusions lacking in conviction:

it depends
it all depends on the facts of the case
each case must be examined on its own facts

Here is another one.

There is no dispute a Liquidator has a duty to realise the assets of a company so surely the duty to litigate to get in the assets is a black and white one? Well, no it is not.

The answer is such duties are underpinned by the nebulous concept of reasonableness. Was the conduct complained about that which no reasonable Insolvency Practitioner would have done?

Matters might depend on whether the case is one with no assets other than the potential claim to be litigated through legal proceedings. Or whether there are assets available to fund the claim and protect the Liquidator from the risk of adverse costs.

A Liquidator’s duty to litigate is a fascinating issue (for Liquidators at least) but nevertheless a Gordian knot.

Duty To Collect In Assets

Liquidator duties require him or her to realise the property of the company and undertake an orderly winding up so that after the costs and expenses of Liquidation, a distribution can be made to creditors.

The obligation to realise company assets would suggest there is a duty for a Liquidator to litigate. However, a Liquidator is entitled to take commercial decisions in the interests of creditors. A decision to litigate is a commercial decision. 

liquidator duty to collect in assets

Property of the company is defined in Section 436 of the Insolvency Act 1986:

property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property;

which includes any claims that might need to be litigated through legal proceedings.

The issue was perhaps well summarised in the case of Metalloy Supplies Ltd v M A (UK) Ltd [1996] EWCA Civ 671:

It is not an abuse of the process of the Court or in any way improper or unreasonable for an impecunious plaintiff to bring proceedings which are otherwise proper and bona fide while lacking the means to pay the defendant’s costs if they should fail …  Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. If he does so in his own name, he is personally liable for the costs in the ordinary way, though he may be entitled to an indemnity out of the assets of the company. If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not.

Types Of Liquidator Litigation

In Liquidation, there are two types of claim a Liquidator can usually run.

Claims in the name of the company itself such as an unlawful dividend claim or an overdrawn director’s loan account or general commercial litigation claims the company may be in dispute with another over.

Separate to that there are claims that can specifically sprout only after the company goes into Liquidation. Those are specifically created by the Insolvency Act 1986. These will be claims such as Wrongful Trading and Antecedent Transactions. They are known as Insolvency Act claims.

Risk For Liquidators Bringing Proceedings

Notwithstanding what was said in the Patley Wood case below there is a risk for Liquidators who bring legal proceedings in terms of their potential personal liability.

risk for liquidators bringing legal proceedings

This position was set out notably in the case of Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 (“Wilson Lovatt”):

… 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.

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 … It seems to me that it is quite a different matter where the liquidator himself takes it on himself to institute proceedings, whether they be proceedings in the winding-up or otherwise.

Litigation Is A Commercial Contest Over Legal Rights

Litigation over assets means there will be a contest over entitlement to them. That means uncertainty.

There is always a risk when a person litigates. Almost all Mediators looking to assist parties to settle a litigation claim will at some point in a Mediation emphasise the litigation risk.

If a case is lost the loser usually has to pay the legal costs of the winner. This is known as the risk of adverse costs. It has been held that a Liquidator who initiates litigation in his own name has to bear the risk of adverse costs if it all goes wrong (see Wilson Lovatt above).

Therefore in view of that risk, a Liquidator who declines to litigate cannot typically be accused of incompetence and or negligence as might be the case if he or she abandoned a known asset. Even, if the company itself (as opposed to the Liquidator) has the right to the litigation claim, similar principles may apply due to the costs associated with litigation.

Litigation is not only risky but it is also costly to pursue. Lawyers, barristers and other litigation support stakeholders who are usually needed to progress litigation claims through the Courts need to be paid. In addition, there are other disbursements such as Court fees that need to be funded. If there are funds in the company then perhaps this might not be a problem. However, it is axiomatic this is often not the case for an insolvent company.

Limits On The Duty To Litigate

There are limits on the duty of a Liquidator to litigate to attempt to realise the property of the company.

It is generally not required that a Liquidator spends his or her own money (including being at risk of adverse litigation costs) in order to realise a claim that may recover further monies for creditors.

In Nicholson v Hardy [2021] EWHC 1311 (Ch) which was considered in the article Liquidator Duty To Bring Claims: The Liquidator And ‘Bomb Proof’ Litigant the Court said:

… nor does he owe a duty to pursue claims where he has no funds available to him to pursue those claims

In Angelic Interiors Ltd (In Administration), Re (Rev1) [2022] EWHC 2974 the following was said:

The decision not to pursue an application to utilise the investigative powers conferred upon them by the Act was down to a decision not to fund such an application themselves. .. that is an entirely understandable commercial decision that they are perfectly entitled to take

The Patley Wood Case

The case of Patley Wood Farm LLP & Ors v Kicks & Ors [2022] EWHC 2973 (Ch) (“Patley Wood“) highlighted the difficulty with the proposition of an Insolvency Practitioner’s duty to litigate. Courts that grappled with the issue produced different decisions.

It was a Bankruptcy case explained in the article Section 303 Trustee In Bankruptcy Application Succeeds which showed the importance of funding on the duty to litigate:

… in ordinary circumstances an officeholder who lacks funds or risks paying costs will not be required to enter into litigation

This case picked up the point in Seear v Lawson (1880) 15 Ch D 426, said, at page 433:

The proper office of the trustee is to realise the property for the sake of distributing the proceeds amongst the creditors. Why should we hold as a matter of policy that it is necessary for him to sue in his own name ? He may have no funds, or he may be disinclined to run the risk of having to pay costs, or he may consider it undesirable to delay the winding-up of the bankruptcy till the end of the litigation.

However, what the Patley Wood case also showed was when an Insolvency Practitioner in a position such as a Trustee in Bankruptcy or Liquidator is provided with adequate funds and indemnities, they may be under some duty in some circumstances to bring legal proceedings that appear likely to produce benefit for the creditors:

In this case the trustees have funding, indemnities, encouraging comments from the Court of Appeal, and a clear opportunity to monetise the cottage for the benefit of the estates. However, they have chosen to fold their arms and do nothing.

However, that was not the end of the story because in Patley Wood the Insolvency Practitioners it seems were faced with a difficult choice. This case highlighted the real problem of the notion of a duty to litigate when it escalated to the Court of Appeal who then reversed the earlier direction of the Court that had ordered the Trustees to become joined in proceedings. The Trustees’ Decision was not perverse said the Court Of Appeal.

Liquidator Being Sued

No matter how risk averse a Liquidator might be there are times when he or she simply cannot avoid litigation.

An example would be following adjudication of creditor claims by an Insolvency Practitioner if a creditor appealed the rejection of their claim then the Liquidator would be a party to legal proceedings when the Court considered such matters with a fresh pair of eyes. However, such litigation is not the usual adversarial type. The Liquidator can (and typically would) adopt a neutral stance and simply leave it to the Court to determine.

Another example might be when someone initiates legal proceedings against the Insolvency Practitioner perhaps to remove a Liquidator.

Oliver Elliot Comment

Oliver Elliot Comment !

Sorry chaps and chappeses, the answer to the question of a Liquidator’s duty to litigate depends on, yes – here it comes – the facts of the case.

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Elliot Green

Author: Elliot Green
Last Updated: June 12, 2024

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Disclaimer: Liquidator Duty To Litigate?

This page is not legal advice and should not be relied upon as such. This article Liquidator Duty To Litigate? is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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