Receivers cannot escape personal liability on contracts they cause the company to enter into simply because all of the company’s assets have been paid out.
So the Court of Appeal found last week in a decision which explored the application of limitation of liability clauses where, as is common practice, the liability is limited to the “available assets” of the company.
The Court dismissed an appeal by the receivers of Lovitt’s NZ Limited, who claimed they could not be liable on orders they had placed as all of the company’s assets had been distributed to the appointing creditor.
The Court was right to dismiss the appeal. Suppliers with purchase orders from receivers should be paid for those orders ahead of appointing creditors. If it were otherwise, no-one would trade with receivers.
In short, the receivers’ indemnity from the company’s assets ranks ahead of the appointing creditor’s security. It is the receivers’ indemnity on which suppliers who trade with receivers depend.
The context of the case
The receivers placed several orders with Huhtamaki in trading Lovitt’s pet food business. They paid five out of seven invoices and then refused to pay the last two, totalling approximately $280,000. The receivers then sold Lovitt’s business and repaid their appointing creditor (which suffered a shortfall).
Huhtamaki sued both Lovitt’s and the receivers for $280,000, alleging that the receivers were personally liable for that amount. The receivers sought summary judgment, arguing that they could not be liable. Their terms of trade limited their personal liability to “the available assets of the company”, and there were no longer any assets.
The High Court declined to grant summary judgment to the receivers. On the available evidence, the Court could not conclude what meaning ought to be given to the expression “available assets” as contained in the receivers’ limitation clause and accordingly could not conclude whether or not there were available assets to meet Huhtamaki’s claim.
The receivers challenged the High Court’s decision, claiming that it called into question the efficacy of the statutory right preserved to privately appointed receivers to limit or exclude liability. Section 32 of the Receiverships Act provides that a receiver is personally liable for post-receivership contracts, but can exclude or limit that personal liability. It is common for receivers to attempt to limit their liability to the assets of the company in receivership.
Was the clause included in the contract?
The first issue was whether or not the receivers’ limitation clause was in fact part of the contract with Huhtamaki.
It was not included in the receivers’ formal terms of trade, and was not of course found in Huhtamaki’s terms of trade (which had arguably been accepted by the receivers). Instead, it was found in a “Confirmation of Debt” form, the apparent purpose of which was merely to ask unsecured creditors to confirm their pre-receivership debt.
While not making a final ruling, the Court said that it was “by no means clear that this can properly be construed as a contractual document for any future supply”.
The clear message for receivers is that they must include limitation clauses in their terms of trade, not in some other document.
What did the limitation clause mean?
The Court then turned to the meaning of the alleged limitation of liability clause, which stated that:
The receivers’ terms for continued supply including the limitation of receivers’ liability to the available assets of the company are noted and accepted.
The receivers conceded that the clause limited, rather than excluded, their personal liability. The plain and natural meaning of the clause is that the receivers have personal liability, but it cannot be for a greater sum than the “available assets” of the company.
Section 32(9) of the Receiverships Act provides receivers with an indemnity out of the assets of the company in receivership for any personal liability. As the Court made clear, this indemnity “takes priority over the appointing creditor’s security”.
The Court said that the limitation clause in this case is best understood as an attempt to ensure that any personal liability of the receivers is no greater than the assets available to the receivers to indemnify them for that liability.
The receivers argued that Lovitt’s had no available assets and therefore the receivers could not be liable, because there was a shortfall to the appointing creditor. The receivers also argued that the material time for measuring the available assets was the date on which the creditor was entitled to be paid (and that had not yet been resolved in Huhtamaki’s favour). Prior to the commencement of the court proceeding, the receivers had sold all of Lovitt’s assets and paid away any funds.
In response, the Court explained that the assets are available to indemnify the receivers, notwithstanding the shortfall, because the receivers’ entitlement to indemnity takes priority over the appointing creditor’s security.
Ultimately, this being a summary judgment application, the Court referred the matter back to the High Court to resolve the exact amount of available assets, and the date at which that calculation ought to be made.
While it is common for receivers to limit their liability to the assets of the company in receivership, post-receivership creditors should still be paid in priority to appointing creditors.
Post-receivership creditors would ordinarily expect to be treated as an expense in the receivership and to be paid ahead of appointing creditors. Such ordinary commercial expectations ought to be given effect to. Otherwise, why would creditors agree to continue to supply companies in receivership?
- Receivers should ensure that limitation clauses are included clearly in their terms of trade.
- In a limitation clause, the “available assets” of the company include funds that are paid to the secured creditor.
For further information, please contact the lawyers featured.