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Focus: Good news for receivers and administrators who act in good faith

28 June 2012

In brief: Australian administrators and receivers – and their lawyers – will gain confidence from a recent English decision that confirms no claim in tort can be brought against an administrator, as an agent, for procuring the company to which he or she has been appointed to act in breach of contract, provided the administrator has acted in good faith. Partner Michael Quinlan and Lawyer Joshua Busuttil report.

How does it affect you?

  • Lictor Anstalt (A Company) v MIR Steel UK Ltd & Ors [2011] EWHC 3310 (Ch) serves as a reminder that where administrators act in good faith carrying out their functions, they will not be held liable for procuring the company to which they have been appointed to commit a civil wrong.
  • This is because administrators are the agent of the company to which they have been appointed, which is the principal, and it is the principal that breaches a contract in these circumstances. In Australia, administrators are also agents of the company to which they are appointed and receivers are, usually, agents of the company to whose assets they are appointed. If the decision is applied in Australia, as we think likely, administrators and receivers, when acting as agents, will not be liable in tort where they cause the company to breach a contract.
  • The defence of justification was also raised in this case. While the court noted that it may extend to circumstances where administrators perform an action that is incidental to discharging its statutory obligations, it noted that it was a novel defence with wide-reaching implications. Unfortunately, as the issue was raised in this case without in-depth analysis and prior findings of fact, the court decided that it was not appropriate for determination in this matter.

Background

Lictor Anstalt supplied steel making equipment (the equipment) to Alphasteel Limited (in liquidation) subject to a retention of title under an agreement dated 3 April 2000 (the April 2000 agreement). The administrators sold the equipment (the sales agreement) to MIR Steel UK Limited, a special purpose company formed by the administrator.

Lictor claimed, among other things, that, Alphasteel breached the April 2000 agreement, and MIR knew of the terms of the April 2000 agreement, therefore, it knew that the sale of the equipment, as evidenced by it entering into the sales agreement, would be in breach of the April 2000 agreement. Lictor also alleged that MIR was liable for inducing a breach of contract, and had conspired with Alphasteel to cause loss by unlawful means.

MIR sought summary judgment, dismissal of the claim for damages for procuring breach of contract and the tort of conspiracy, and, further, sought to join Alphasteel and the administrators as joint defendants.

The decision

Summary judgment dismissed

The court found, among other things, that MIR was a separate legal entity responsible for its own actions. Full effect was given to the meaning of the terms in the sales agreement that stated any claims regarding the equipment were to be settled by MIR, and MIR was required to action any claim in writing by a now expired timeframe. The court also found that MIR's knowledge of the sales agreement and the fact that the transfer of the equipment breached the April 2000 agreement, constituted the requisite intention and participation required. Also, by giving effect to an agreement that caused the unlawful act to occur, MIR itself became a participant in the conspiracy.

Administrators not liable

The application to join Alphasteel and the administrators as joint defendants was dismissed. MIR claimed that Alphasteel and the administrators were liable to contribute towards any losses Lictor suffered because MIR was always under the control of the administrators, who, it was alleged, together with Alphasteel, breached various warranties contained in the sales agreement.

His Honour applied the doctrine established in Said v.Butt1 which held that a servant of a corporation (acting bona fide and within the scope of their authority), who procures the breach of a contract between the employer and a third party, is not personally liable. The key consideration here was that all actions must be within the scope of the agent's authority and performed in good faith. In applying this doctrine, the administrators could not be sued in tort, whether for inducing a breach of contract or in conspiracy, for any acts on their part that they undertook in good faith in their capacity as agents of Alphasteel. The administrators relied upon the fact that it was not in dispute that they had performed their duties in good faith and within the scope of their authority.

The fact that the administrators were acting in the capacity as MIR's agents, and were therefore not personally liable, did not provide a defence to MIR itself. In nearly all cases, it is the actions of agents that cause their principal to commit a civil wrong. If agents ensure that they act in good faith and within the scope of their authority, they will not be exposed to personal liability.

The defence of justification was also raised in this case. While the court noted that this defence may extend to circumstances where an administrator performs an action that is incidental to discharging its statutory obligations, it noted that it was a novel defence with wide-reaching implications. Unfortunately, given the finding that the administrators were not personally liable for the reasons set out above, the court did not need to deal with this defence. It also declined to do so because the issue was raised in this case without in-depth analysis and prior findings of fact.

An Australian connection?

While this case does not establish new law, it affirms the position that in circumstances where administrators act in good faith carrying out their statutory functions, they will not be held liable for a tort committed by their principal. This is because administrators are the agent of the company to which they have been appointed, which is the principal, and it is the principal who breaches a contract in these circumstances. In Australia, administrators are also agents of the company to which they are appointed and receivers are, usually, agents of the company to whose assets they are appointed. If the decision is applied in Australia, as we think probable, administrators and receivers acting as agents will not be liable in tort where they cause the company to breach a contract, so long as they act in good faith and within their authorised power. The defence of justification may be available to an administrator or receiver who is alleged to be a tortfeasor, however, this issue will need to await consideration in another case.

Footnotes
  1. [1920] 3 K.B. 497.

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