When Can A Liquidator Be Held Personally Liable For Costs?

Introduction: The Liquidator’s Role and the Specter of Personal Costs

When a company faces insolvency, a liquidator steps in to manage its affairs. This crucial role involves realising assets, investigating the company’s dealings, and distributing proceeds to creditors. Naturally, this process incurs costs – from the liquidator’s own fees to legal and administrative expenses. Generally, these are paid from the insolvent company’s assets. The Insolvency Act 1986 (IA 1986) and the Insolvency (England and Wales) Rules 2016 (IR 2016) provide the framework for these costs. 

The “Exceptional” Nature of Personal Liability

It’s a cornerstone of UK insolvency law that holding a liquidator personally liable for costs, especially litigation costs, is an exceptional measure. This protection is vital. Liquidators often pursue complex and contentious claims. If they constantly faced personal financial ruin for performing their duties, finding willing professionals would be challenging, and those who did accept might be overly cautious, harming creditors’ interests.

The law strives to balance protecting liquidators acting properly with providing recourse against those who demonstrate misconduct.

The General Rule: Costs are Paid from the Insolvent Estate

Insolvency Expenses: A Priority

The IA 1986 and IR 2016 stipulate that costs properly incurred in a winding-up are paid from the company’s assets, prioritised over most other claims. These include legal fees, accountancy costs, valuation expenses, the liquidator’s remuneration, and asset realisation costs. If reasonable and for the estate’s benefit, these are usually priority claims.

A liquidator acting correctly is generally entitled to an indemnity from the company’s assets for costs incurred, including litigation costs. This is crucial for enabling them to pursue claims for creditors’ benefit.

However, this indemnity isn’t absolute. Costs must be “reasonably incurred” and for the “benefit of the estate”. Doubts about the “appropriateness, fairness or reasonableness” of sums claimed can be resolved against the office-holder. Remuneration should reflect the “value of the service rendered,” not just time spent. Negligence or misconduct can jeopardise this indemnity. The Practice Direction on Insolvency Proceedings (PDIP) provides further guidance on remuneration applications.  

Even if costs are legitimate estate expenses, the actual availability of assets is key. Adverse costs orders against the company in liquidation rank as an expense, potentially depleting funds before the liquidator’s own remuneration for that litigation is met.

Personal Liability as a Non-Party: A High Bar to Clear

A liquidator directs litigation for the company but isn’t usually a personal party. However, courts can make costs orders against non-parties, which is how a liquidator might become personally liable.

The Court’s Power: Section 51 Senior Courts Act 1981

Section 51 of the Senior Courts Act 1981 grants courts wide discretion over costs, including against non-parties. CPR 46.2 outlines the procedure, requiring the non-party to be joined for costs purposes and given a chance to be heard. This discretion must be exercised “justly”.

Exceptional Remedy: Protecting the Public Function

A non-party costs order is an “exceptional” remedy. This was highlighted in Symphony Group PLC v Hodgson QB 179. For liquidators, this exceptionality is rooted in public policy: they perform a vital public function, and routine personal liability would undermine the insolvency system.

The Metalloy Supplies Test: “Impropriety or Bad Faith”

The Court of Appeal in Metalloy Supplies Ltd v M A (UK) Ltd BCC 165 established that personal liability for a liquidator arises only from their “impropriety or bad faith”. In Metalloy, no such conduct was found.  

What Constitutes “Impropriety” or “Bad Faith”?

These terms aren’t rigidly defined. “Bad faith” implies dishonesty or malicious intent. “Impropriety” is broader, suggesting conduct unacceptable for a liquidator, a serious deviation from professional standards – more than mere negligence. The Hong Kong case Super Speed Limited (in Liquidation) v Bank of Baroda affirmed that “impropriety,” not just “unreasonableness,” is needed. Pursuing purely speculative litigation or acting for personal gain rather than creditor benefit could be deemed improper.  

Security for Costs: The Primary Recourse

Metalloy Supplies also stressed that defendants sued by an impecunious company (like one in liquidation) should primarily seek security for costs. Failure to do so can weaken a later application for a personal costs order against the liquidator.  

This high “impropriety” threshold prevents overly defensive liquidations, encouraging robust action for creditors. Security for costs applications act as a filter, reserving personal orders for genuinely blameworthy conduct.

When Else Might a Liquidator Face Personal Costs? Judicial Considerations

Beyond the “impropriety or bad faith” test for non-party costs orders (NPCOs), other factors can influence a liquidator’s personal cost exposure.

Unreasonable Conduct and the “Perversity” Test

Courts are reluctant to interfere with a liquidator’s commercial judgment. Intervention requires the liquidator to have “done something so utterly unreasonable and absurd that no reasonable man would have done it” – the “perversity” test from Re Edennote, affirmed in Re Edengate Homes (Butley Hall) Ltd EWCA Civ 626. This is a “formidable test”. While mainly for substantive decisions (like asset sales), perverse conduct in litigation could support personal costs liability, likely overlapping with impropriety. 

Litigation for Personal Gain

If litigation is pursued for the liquidator’s personal benefit (e.g., to generate fees) rather than for the company or creditors, this strongly indicates impropriety and can lead to personal costs or denial of indemnity. The Irish case of United Power Limited saw a provisional liquidator personally liable for costs of an unsuccessful application to increase his own remuneration, deemed self-serving. Similarly, in the Australian case Australia’s Residential Builder Pty Ltd (in liquidation) v Wiederstein (No.2), an appeal pursued solely to meet the liquidator’s fees resulted in personal costs.

Broader Misconduct

General misconduct can also lead to personal costs or loss of indemnity. The “Ballyrider Principles” (from Irish law, but reflecting UK concepts) suggest indemnity can be denied for misfeasance, bad faith, serious negligence, unfitness for office, or dishonesty. Section 212 IA 1986 allows action against office-holders for misfeasance. Australian examples (often sharing common law roots) include unreasonably defending proceedings, rejecting sensible settlements, provoking litigation through self-interest, or causing unnecessary costs through poor communication.

Litigating in the Liquidator’s Own Name

A distinction exists when a liquidator sues in their own name (e.g., for wrongful trading under s.214 IA 1986 or misfeasance under s.212 IA 1986 ). Here, they are a direct party. The rule “costs follow the event” (CPR 44.2(2)(a)) applies more directly, making them prima facie personally liable if unsuccessful. While indemnity from company assets is expected, it can be lost through misconduct.

Specific Contexts: Environmental Liabilities

In areas like environmental protection, liquidators might face personal statutory liabilities, for instance, for remediation costs if their actions or omissions regarding environmental hazards are deemed unreasonable.

These considerations span a spectrum from “unsatisfactory” conduct (which may not be enough for intervention, as in Re Edengate Homes ) to “unreasonable” conduct, “perversity,” and ultimately “impropriety or bad faith.” 

Losing the Shield: Denial of Indemnity from Company Assets

Even without a direct NPCO, a liquidator’s finances are hit if denied indemnity from company assets for costs incurred.

Why Might Indemnity Be Denied?

Indemnity relies on proper conduct for the estate’s benefit. It can be denied for:

• Misfeasance or breach of duty: Abusing powers, breaching fiduciary duties, or negligence causing loss.
• Bad faith: Dishonest or improperly motivated actions.  
• Serious negligence: Culpable negligence, though simple errors in judgment might be excused. 
• Unreasonable cost incurrence: Unnecessary or excessive costs.
• Actions for personal benefit: Prioritising personal gain over the estate’s interests. 

Denial of indemnity means the liquidator cannot use company funds to cover costs for which they are liable.

The Practical Problem: Insufficient Assets

A major risk is when the insolvent company lacks assets to cover all liquidation costs, including adverse costs orders. Even with impeccable conduct, an indemnity is worthless without assets to back it. If the liquidator is personally liable for costs (e.g., from losing a case brought in their own name, or an NPCO), they bear any shortfall. This risk drives the use of litigation funding and creditor indemnities.  

Practical Steps for Liquidators to Mitigate Personal Cost Risks

Liquidators must be diligent in managing the risk of personal liability.

1. Thorough Pre-Litigation Assessment: Rigorously assess the merits of any legal action, including potential costs, prospects of success, asset availability, and net benefit to creditors. Obtain comprehensive legal advice. 

3. Anticipate Security for Costs Applications: Be prepared for defendants to seek security for costs when the company is the claimant.

4. Explore Funding and Indemnities: If estate assets are insufficient, actively seek litigation funding or specific indemnities from interested creditors. Scrutinise funding agreements for adequate protection against adverse costs. Consider After The Event (ATE) insurance. 

5. Avoid Conflicts of Interest and Personal Benefit: Never pursue litigation primarily for personal gain (e.g., fee generation) rather than genuine creditor benefit.

6. Act Reasonably and Proportionately: Conduct litigation reasonably, consider sensible settlement offers, and avoid vexatious tactics. Unreasonable refusal to settle or pursuing hopeless cases can lead to adverse costs.  

These steps are essential for defending against allegations of impropriety or unreasonable conduct.

Conclusion: Balancing Protection and Accountability

UK law makes personal liability for liquidators an exceptional outcome. Costs are generally paid from the insolvent estate. An NPCO against a liquidator typically requires “impropriety or bad faith” (Metalloy Supplies Ltd). Security for costs is the primary defendant recourse.  

Liquidators acting honestly, diligently, reasonably, and in creditors’ best interests are generally well-protected. Proper procedure, careful advice, transparent decisions, and good records are key.

The law balances the public interest in enabling liquidators to perform their duties effectively against the need for accountability and remedies for misconduct.

Regarding Sanrose Investment Ltd v Foley & Ors, its precise impact on this area awaits further detailed legal reporting and analysis.

The legal framework empowers liquidators to act robustly for creditors while incorporating safeguards against improper conduct, maintaining the integrity of the insolvency regime.

Table 1: Key UK Case Law on Liquidator Personal Liability for Costs

 Table 2: Thresholds for Scrutiny of Liquidator’s Conduct Regarding Costs/Decisions