Administration – Duty of care – Defendants appointed as administrators of company – Sole secured creditor owned by trust of which first and second claimants the beneficiaries – Third claimant suing as unsecured creditor – Claimants alleging negligence and misfeasance by administrators – Whether having cause of action – Whether special relationship existing between them and administrators such as to found duty of care – Claim dismissed
In 2003, the second defendant was appointed as the administrator of a company that traded as an estate agent and whose managing director, C, was the father of the first and second claimants and the husband of the third claimant. The appointment was made by H Ltd, which was the majority shareholder in the company and which held a charge over its assets to secure a loan of £250,000 made in 2001. H Ltd was wholly owned by a trust of which the first and second claimants were the beneficiaries.
The third claimant and C subsequently divorced. The third claimant received no financial provision from her husband in the divorce proceedings since he had no assets. However, the court intended that the two children of the marriage should receive the benefit of the disposal of the company’s assets by means of the repayment to H Ltd of the secured loan and, accordingly, gave directions regarding the conduct of the administration.
The administration realised nothing for the company’s creditors. The claimants brought proceedings against the administrator, and the partnership of which she was a partner, for negligence and misfeasance in the conduct of the administration. The third defendant claimed to be entitled to sue in the capacity of an unsecured creditor of the company.
The defendants applied to strike out the claim. They contended that, inter alia, the facts alleged by the claimants did not establish the existence of a special relationship between the claimants and the defendants such as to establish a cause of action in negligence.
Held: The defendants’ application was granted and the claim was dismissed.
(1) A special relationship was required to found a claim by an unsecured creditor against an administrator: Kyrris v Oldham [2003] EWCA Civ 1506 and Lomax Leisure Ltd (in liquidation) v Miller [2007] EWHC 2508 (Ch) applied. The claimants had to demonstrate why the defendants owed them a duty of care in addition to the duty of care that was owed to the company and possibly to H Ltd directly.
(2) The first and second claimants had no cause of action against the defendants solely by reason of their position as beneficiaries of the trust that owned H Ltd. Since the trustees of the trust, as shareholders in H Ltd, had no cause of action against the defendants for breach of a duty owed to H Ltd, a fortiori neither did the first and second defendants as beneficiaries of the trust. A duty of care owed directly to a beneficiary would be imposed only in exceptional circumstances where a special relationship could be shown, beyond the mere fact that the beneficiary stood to lose if a company owned by the trust suffered loss. There was ordinarily no need for the court to impose a duty of care by the administrator directly to the beneficiary, since it was open to the trustees of the trust to procure H Ltd, as the creditor company, to bring a claim against the administrator under section 212 of the Insolvency Act 1986. Accordingly, the court did not need to impose a direct duty of care to the beneficiary in order to allow recovery for a wrong that would otherwise go uncompensated.
The facts pleaded did not establish a special relationship between the first and second claimants and the defendants. It was insufficient to show that the divorce court had taken a close interest in the administration and had given directions as to the manner in which it should be carried out, and that the administrator was aware that the children were relying on the successful conclusion of the administration to provide them with funds. The mere fact that an administrator or liquidator was aware of the identity of the company’s sole secured creditor, and appreciated that that creditor was in serious need of whatever money could be realised from a sale of the company’s business, could not without more create a special relationship. The second defendant had not assumed a responsibility towards the children over and above the responsibilities that she owed as administrator to the company, nor had she stepped outside her role as administrator to undertake some special duties to the children: Caparo Industries plc v Dickman [1990] AC 605 considered.
(3) With regard to the third claimant, no special relationship or duty of care could arise on the facts pleaded because the purpose of the administration was to realise cash for payment to the trust and there was no suggestion that the sale proceeds would be sufficient to leave a surplus for unsecured creditors. Consequently, none of the claimants had a cause of action.
The third claimant appeared in person for the claimants; Peter Oliver (instructed by Beale & Co Solicitors LLP) appeared for the defendants.
Sally Dobson, barrister
