Can an Administrator be Liable for Their Actions?
The short answer to this is yes. There are a variety of circumstances, as per Section 212 of the Insolvency Act which deals with misfeasance or breach of duty, where an administrator may be held liable to pay damages.
This is, however, a complex area and one where different interpretations apply depending on context.
Where a claimant (for example, a creditor) feels compelled to bring a claim against an insolvency officer, they may bring what are called ‘misfeasance proceedings’ against them in order to request the court to compel the officer to contribute to company assets. This may be appropriate in cases where the insolvency practitioner has demonstrated a clear ‘breach of duty’, for example, fraud, misfeasance, breach of fiduciary duty.
Class claims against an Insolvency Practitioner would be appropriate where it is felt the company itself has suffered, rather than an individual, because of the insolvency practitioner’s breach of duty. The route for bringing such a claim against an administrator is outlined in the Insolvency Act 1986, Paragraph 75 of Schedule B1, which gives the court permission to investigate the conduct of an IP who appears to have ‘misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of fiduciary duty in relation to the company.” Where the court rules against the IP, they may compel him/her to repay the money (with interest) or to contribute ‘such a sum of money to the company’s assets as it sees fit.’ One of the more common instances, where this occurs, is where one IP replaces another in a case that isn’t proceeding smoothly. That Insolvency Practitioner may then feel there is a case of some kind against the IP who went before him.
When is the Insolvency Practitioner an ‘Agent of the Company’
Many legal cases in which claims have been brought against an IP have hinged on the subject of whether the office holder was acting as ‘agent of the company’. In any situation where it can be proved that the administrator was acting as an agent of the company, he/she becomes immediately exempt from prosecution. In the cases of administrators, Schedule B1, paragraph 69 of the Insolvency Act states that during the exercise of his functions ‘an administrator acts as the company’s agent’. In these cases, it will be down to the individual wording of the contracts to decide whether liability can be rightfully asserted. Because of this legal grey area, many administrators will insist on clear contracts stipulating their personal non-liability. This would not protect any IP, regardless, where fraud or other torts involving third party assets are committed
If you are considering putting your business into administration, you should always seek professional advice in advance. We’re always happy to help, simply give us a call on 0800 074 6757 for a no-obligation, free consultation. or chat using the Live Chat box on the bottom right of the screen.