PERSONAL LIABILITY OF JUDICIAL MANAGERS AND RECEIVERS UNDER THE COMPANIES ACT

• Citation: (1996) 8 SAcLJ 249
• Published date: 01 December 1996
• Author: LEE ENG BENG
• Date: 01 December 1996

Powdrill v Watson

By express statutory provision under the Companies Act, personal liability is imposed on judicial managers and receivers of companies under certain circumstances in respect of transactions into which they cause the company to enter. Pursuant to section 227(1)(b),1 a judicial manager is personally liable on any contract, including any contract of employment, entered into or adopted by him in the carrying out of his functions, unless such personal liability is excluded by the contract or by a notice given to the other party.2 He is however entitled to an indemnity in respect of that liability out of the company’s property in priority to unsecured debts and debts secured by a floating charge.3 The personal liability of a company receiver is governed by a different formula; section 218(1) provides that a company receiver shall be liable for debts incurred by him in the course of the receivership or possession for services rendered, goods purchased or property hired, leased, used or occupied.

With respect to section 227(1)(b), the concept of adoption used in that provision is found in certain English statutory provisions of the Insolvency Act 1986 relating to administrative receivers and administrators.4 An administrative receiver in England is personally liable on any contract entered into by him in the carrying out of his functions (except in so far as the contract otherwise provides) and any contract of employment adopted by him in the carrying out of his functions, and he is entitled to an indemnity out of the assets of the company in respect of this liability.5 Though superficially similar, section 227(1)(b) is different in two key respects. Firstly, the judicial manager is personally liability on all contracts adopted by him and not only contracts of employment. Secondly, the judicial manager’s

personal liability may be excluded for all contracts whether entered into or adopted by him.6

The concept of adoption also appears in the English legislation with respect to administrators and administrative receivers. With respect to administrators, the rule is that any sums payable in respect of debts or liabilities incurred while a person is an administrator of a company, under contracts of employment adopted by him, shall be charged on and paid out of the company’s property in priority to even his proper remuneration and expenses.7 In the case of an administrative receiver, he is personally liable on any contract of employment adopted by him, though he is entitled, in respect of such liability, to an indemnity which is charged on and paid out of the company’s property.8

Adoption is a concept that has given rise to much litigation in England. In Powdrill v Watson9 the House of Lords, after a series of controversial decisions in the lower courts,10 finally had the opportunity to address the question of when a contract of employment is ‘adopted’ by an administrator or administrative receiver of a company and the consequences of such adoption. The case arose from a combined hearing of three appeals, one involving a company in administration and the other two involving companies in administrative receivership. In each case, the administrators or the administrative receivers wrote to the company’s employees stating that the company will continue to employ them but that they were not adopting the contracts of employment. The first question for their Lordships’ decision was whether there had been adoption of the contracts of employment notwithstanding the protestations of the administrators and administrative receivers to the contrary. This question was answered in the affirmative. Lord Browne-Wilkinson, with whom the other Law Lords agreed, held that ‘adoption’ in the context of the English provisions connoted some conduct by the administrator or administrative receiver which amounted to an election to treat a contract of employment with the company as giving rise to a separate liability in the administration or

receivership. There could not be conditional or qualified adoption. If employment was continued for more than 14 days11 after the appointment of the administrator or the administrative receiver then there has been adoption of the contract of employment.

With regard to the local position, the rule in Powdrill v Watson that continuation of employment equals adoption of the contract of employment would probably apply to section 227I(1) in so far as contracts of employment are concerned. However, as mentioned above, the test of adoption in section 227I(1)(b) applies to all contracts to which the company is a party and not only to contracts of employment. With respect to other types of contracts, one can only refer to the general test of adoption put forward by Lord Browne-Wilkinson, that is, whether there is conduct by the judicial manager which amounts to an election to treat a contract with the company as giving rise to a separate liability in the judicial management. One suggestion may be that, by analogy with the treatment of contracts of employment in Powdrill v Watson, the judicial manager should be treated as having adopted a contract if he allows the contract to remain on foot and takes no steps to repudiate it. This approach would be misconceived. Unlike a receiver, a judicial manager is a true agent of the company and is generally not at liberty to act in disregard of the company’s contractual obligations.12 He should not be taken to have adopted a contract merely because he refrains from repudiating it or performs the company’s side of the bargain; such conduct is consistent with his agency and, in the absence of any other factors, cannot constitute an election to treat the contract as giving rise to a separate liability. Unequivocal conduct, such as an express or implied declaration of adoption, would be required. A contract of employment attracts the application of apparently different rules because it is usually determinable by either side upon the giving of notice; the company is under no obligation to continue the employment indefinitely. Thus, the continuation of employment amounts to a decision not to exercise the company’s right to terminate the employment and this, as held in Powdrill v Watson, would be an election to treat the contract of employment as giving rise to a separate liability in the judicial management. The dichotomy, then, is not really between contracts of employment and other contracts.

The critical question is always whether there has been an election by the judicial manager. If a contract is not determinable other than by its breach or by the assumption of some liability by the company, its continuation by the judicial manager can never in itself constitute adoption. If, on the other hand, a contract may be terminated by the company without any consequential liability, whether by virtue of a contractual stipulation to that effect or a repudiatory breach by the other party, so that the decision whether to so terminate merely involves an exercise of managerial discretion, the judicial manager’s restraint from terminating the contract would constitute adoption of the contract.13

The second aspect of Powdrill v Watson which bears mention is the holding that, although the administrators and administrative receivers were taken to have adopted the contracts of employment, the consequence of such adoption applied only to liabilities arising during the period while the respective administrators and administrative receivers held office. In the context of administration, section 19(5) of the Insolvency Act 1986 provided that any sums payable in respect of debts or liabilities incurred while a person was administrator, under contracts entered into or contracts of employment adopted by him in the carrying out of his functions shall be charged on and paid out of the company’s property in priority to certain debts. Lord Browne-Wilkinson held that this provision applied only to debts or liabilities which had become due, though not necessarily immediately payable, during the period of administration; debts or liabilities which had become due before or after the period of administration were excluded, even though they arose under a contract entered into or adopted by the administrator. Moreover, the Apportionment Act 1870 applied in respect of arrears which accrued before the appointment of the administrator but which were not immediately payable. A similar conclusion was reached with respect to the position of the administrative receivers. Section 44(1)(b) of the Insolvency Act 1986 which made an administrative receiver personally liable ‘on’ any contract entered into by him or any contract of employment adopted by him was held to be similarly restricted in its application to liabilities incurred under the contract during the period of administrative receivership.

In Singapore, section 227J(3)(a) provides that, where a...