[2025] EWHC 2316 (Ch)

The argument that the statutory regime does not provide for, and therefore excludes limitations of liability

In response to the argument that the statutory regime does not provide for, and therefore excludes, limitations of liability, the Defendants argue that in other contexts where shareholders appoint an officer, or a particular role can be said to be the creation of statute, the general law has not recognised or implied any inherent prohibition on appointees limiting their liability. Rather, it has been necessary for there to be specific legislation restricting limitations on liability.

For example s.232 of the Companies Act 2006 (“CA 2006”) renders void any provision to exempt a director to any extent from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company.

Similarly, CA 2006 s.532 stipulates that any provision for exempting an auditor of a company (to any extent) from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company occurring in the course of the audit of accounts is void, subject to certain exceptions.

The Defendants make the point that Parliament clearly knows well how to legislate to prevent any exclusions or limitations of liability by statutory officeholders but has chosen to make no such provision in the case of liquidators.

To support his point that the mere fact that an office has been created and/or regulated by statute, does not of itself impose any prohibition on the ability of the parties to agree that an office-holder might limit his liability, Mr Deacock, for the Defendants referred me to Re City Equitable Fire Insurance Company [1925] Ch. 407 (“City Equitable”).

In this case, the Official Receiver as liquidator, brought a misfeasance summons under s.215 of the Companies (Consolidation) Act, 1908 (“CCA 1908”). Section 215 was a precursor to s.212 IA 1986 and in similar terms (although differently formatted). The Official Receiver was seeking to make the respondent directors and auditors liable for negligence in respect of losses occasioned by investments and loans and the payments of dividends out of capital dishonestly brought about by the managing director. The directors (other than the managing director) and the auditors had acted honestly throughout. They sought to rely on provisions in article 150 of the company’s articles of association. This provided an indemnity to the directors, auditors, secretary and other officers for the time being of the company (amongst others) and the trustees (if any) for acting in relation to any of the affairs of the company. The indemnity covered all actions, costs, charges, losses, damages and expenses incurred in the execution of their duty, except where the liability arose through their own wilful neglect or default. The article also provided that none of them shall be answerable for the acts, receipts, neglects or defaults of the other or others of them.

Romer J (at page 442), faced with an argument that the rights given by s.215 CCA 1908 are independent of and cannot be modified by any provision contained in the articles of association, refused to accept that argument and instead followed the decision in In re Brazilian Rubber Plantations and Estates, Ltd. [1911] 1 Ch. 425. In that case, Neville J had considered that it was not unlawful for a company to engage its directors upon such terms and found accordingly:

“I do not think, therefore, that an action by this company against its directors for negligence, where no dishonesty was alleged, could have succeeded. It appears to me that an application under s. 215 of the Companies (Consolidation) Act, 1908, stands on the same footing."

On this basis Romer J found (at page 500) that, whilst the auditors and the respondent directors failed in some matters to perform their strict duty, and, but for the provisions of art. 150, he would have had to grant some relief to the Official Receiver, he would not do so, as if he were to do so he would:

“... in effect, be depriving them to a material extent of the protection which that article affords, and for which they must be deemed to have stipulated as a condition of the service that they undertook to render”.

The Official Receiver appealed from this decision so far as it affected the auditors. Pollock M.R. gave the leading judgment in the appeal. It had been argued before him that article 150 could not amend rights given by statute. In this context, he noted (at page 507) that s. 215 CCA 1908 deals only with procedure and does not give any new rights. It provides a summary mode of enforcing existing rights. He went on to consider the statutory duties of auditors (under s.113 CCA 1908) to produce a report to shareholders. In summary, he considered that the auditors did meet their statutory requirements but were negligent in part in how they went about doing this. This negligence was covered by the exculpation from liability under article 150 such that the auditors were not to be liable for any “loss, misfortune, or damage which may happen in the execution of their respective offices or trusts, or in relation thereto, unless the same shall happen by or through their own wilful neglect or default respectively”. He considered that the article was not ultra vires and did not offend against s.113.

Sargant LJ agreed noting at page 528:

"We have therefore to consider whether if the company here had brought an action against the auditors for neglect or default the defendants would have been entitled to avail themselves of the protection given to them by the article in question. I can see no reason why they should not do so. The article does not limit the nature or extent of the auditor's duties under s. 113. It is in no way contrary to the scheme of the Act, and such cases as In re Peveril Gold Mines, Ld. (1) and Payne v. The Cork Co. (2) seem to me to have no application whatever to this case. The article merely operates to limit the liability of the officers of the company by relieving them from the consequences of certain kinds of neglect or default. It might as well be said that a clause of this kind in trust deeds should be inoperative, because it would tend to induce trustees to be negligent of the interests of their cestuis que trust. The truth is that such restrictions on liability may, and I think often do, operate to protect rather than harm beneficiaries, because they prevent honest and responsible persons from being frightened away from accepting an office which might otherwise involve them in various unmerited and unexpected losses notwithstanding perfect honesty on their part."

Mr Deacock also took me to the two cases referred to in that passage, In re Peveril Gold Mines Ltd [1898] 1 Ch. 122 and Payne v. The Cork Co. [1900] 1 Ch. 308, which provided examples of clauses which were seeking to oust rights given in the legislation in contrast to merely providing an additional jurisdiction to the court.

I agree with Mr Deacock that two points can be taken from this judgment:

As regards liquidators, an example of the first case might be a clause purporting to relieve them of the obligation to make a report required by statute or by the Insolvency Rules. Another would be a clause seeking to vary the way that they are obliged under statute and the Insolvency Rules to distribute the assets of the company. As regards the second case, Mr Deacock argues that this would include an exemption clause of the type that we are considering.

As regards this part of the argument, I can see the logic of Mr Deacock’s reasoning, but, as I discuss below, I consider that it fails once one deals with the implications of the statutory trust.