Can Liquidators Contractually Limit Their Liability?

Can liquidators or their firms contractually limit their liability? This was the issue considered by the High Court of England and Wales (Court) as a preliminary question in Pagden v Fry [2025] EWHC 2316.

The case arose from the members' voluntary liquidation of three companies, Core VCT plc, Core VCT IV plc, and Core VCT V plc (Plaintiff Companies). Having been dissolved following the purported completion of earlier liquidations, they were restored, and the new liquidators brought claims against the former joint liquidators and their associated firms. A number of assumed facts underpinned the judgment, including that Letters of Engagement (LoE) were provided to the Plaintiff Companies by the former liquidators' firms in March 2015; that the former liquidators owed duties to the Plaintiff Companies, including to ensure the sale of the principal company assets was conducted at fair value; that the former liquidators breached those duties; and that their firms were vicariously liable for those breaches.

The former liquidators and their firms maintained that they were protected by a limitation of liability clause in the LoE, which purported to restrict their liability to £1 million. The preliminary question that the Court had to consider was whether the LoE so limited the liability of the former liquidators and their firms to an aggregate sum of £1 million.

The Court held that a liquidator cannot limit his/her liability for acts performed in their capacity as liquidator. Central to the Court's decision was its reliance on Ayerst (Inspector of Taxes) v C. & K. (Construction) Ltd [1976] A.C. 167, which introduced the concept of the "statutory trust" to liquidations. The Court opined that it is no longer the case that the liquidator's role is regarded as that of an agent of the company. Instead, the liquidator must be seen as a fiduciary, holding assets in trust to be administered according to statute, and not granting any beneficial ownership rights to creditors, contributories, or indeed to the company itself. It found that the duties of a liquidator arising out of the statutory trust are not duties owed to a company. They are the obligations of a fiduciary to carry out the purposes of the statutory trust. As such, the Court held that a company, whether acting through its directors or its shareholders, could not modify the responsibilities or liability of liquidators. Finding that the statutory duties of liquidators are not owed purely to the company in question, the Court concluded that the company could not modify the liability of the former liquidators for performing them negligently.

The Court went on to find that while the former liquidators could not limit their liability, the position of the firms was different. This is because firms may have separate contractual obligations to companies, such as pre-appointment advice or support services, and a liability cap could apply to these contractual obligations. The Court explained this by reference to the "gap between theory and reality", whereby in theory (law), only an individual can be appointed as a liquidator. But in commercial reality, it is the insolvency firm that employs the liquidator who does most of the day-to-day work. This gap creates a difficulty when applying contractual liability rules in practice. The Court opined that the LoE attempted to bridge the gap by committing to provide employees or members suitable for appointment as liquidator, and if appointed, to provide their services and make staff available during the liquidation.

The Irish approach

The key question arising from this case for Irish insolvency practitioners is whether it is likely to be followed in Ireland, where liquidations are managed on a similar basis. The underlying principle, that a liquidation creates a statutory trust and imposes fiduciary obligations on liquidators, is a feature of Irish law (see In the matter of GTLK Europe DAC [2023] IEHC 485, Re Lance Investments Limited (In liquidation) [2018] IEHC 444, and Re Mouldpro International Limited (in liquidation) [2018] IECA 88). Consequently, there is a reasonable basis for asserting that this restriction on liquidators would apply under Irish law.

Importantly, this question concerns the relationship between the company/ liquidation estate and the liquidator; it does not affect the liquidator's ability to limit liability in dealings with third parties. Nonetheless, a carefully drafted letter of engagement should still be able to protect a liquidator's firm and staff from certain types of claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.