In a presentation to the ICAEW for their annual conference this month, Neil Stewart identifies common misconceptions across a range of topics in which directors’ duties feature and explains the true position.

Here is a small sample:

1. “Directors’ duties are now all codified in the Companies Act 2006”

Not quite. Certain duties derived from Common Law and equitable principles have been codified and appear in sections 171–177 of the Companies Act 2006. They are known as the "general duties". But there are still important Common Law duties which are not embodied in statute. These include duties for directors to:

1. account for their stewardship of the company’s assets (Breitenfeld v Harrison [2015] EWHC 399 (Ch) at para 60);
2. inform themselves of and join their co-directors in supervising and controlling the company’s affairs (Re Westmid [1988] 2 BCLC 646); and
3. maintain sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties (Secretary of State for Trade & Industry v Baker [1999] 1 BCLC 433).

So, it is not an option for directors to sit back and do nothing while their co-directors are running amok. Directors sometimes seem genuinely surprised that they are being pursued for the misdeeds of their co-directors and say “But I didn’t do anything”. Precisely.

2. “You only have six years from the date of breach to issue a claim”

That’s true in some circumstances but not always. Exceptions include:

1. Continuing breaches. If, for example, a director diverts company funds to their own account, to be used for non-company purposes, he has an ongoing obligation to pay it back and he is in breach of that obligation right up until the company enters an insolvency process, if not beyond. So, even if the original breach occurred more than six years ago, the company through its liquidators or administrators, or their assignee, might be able to pursue the director for the continuing breach.
2. Section 21 Limitation Act 1980 disapplies all time limits in that Act. The conditions in the first limb, set out in s 21(1)(a), require fraud or a fraudulent breach of trust which can be difficult to prove, but the alternative conditions in s 21(1)(b) enable the company to recover any company property or the proceeds of company property that have passed through the director’s own hands, irrespective of how long ago the property (including cash) was taken from the company.
3. Section 32 can defer the commencement of the limitation period to when the company enters liquidation or administration. This can happen if the directors deliberately committed breaches of their duties to the company and would have been the only people who could have known about those breaches until either the board was replaced or an independent office holder was appointed. That amounts to deliberate concealment and the limitation clock doesn’t start ticking until it is or can be discovered.

Directors may therefore be mistaken if they think they only have to worry about events that took place within the last six years.

3. On bounce back loans: “The company’s breach of duty claims against its directors are all about the fraudulent application and obtaining of the loan”

In dishonestly obtaining a loan, the director may have defrauded the bank, but he probably hasn’t defrauded the company. Furthermore, obtaining the loan does not cause any loss to the company because the effect is balance sheet neutral. Both the breach of duty and consequent loss occur when the company funds are misused. It is coincidental that those funds originated as a bounce back loan, although it might be helpful for the claimant, in painting the picture, to show the funds were obtained fraudulently in the first place.

4. “You can’t come after me for dividends paid to other shareholders”

In an action to recover an illegal dividend (which might not, in reality, be a dividend) as a debt, it is true that the claimant can only recover from a shareholder the amount he has received personally. But in a breach of duty claim, the directors may be jointly and severally liable to repay the total sum unlawfully paid out to shareholders.

These and many other misconceptions about directors’ duties crop up with surprising regularity, for example in connection with directors’ loan accounts, tax avoidance schemes, enforcement and evidential requirements. We hope you get the chance to watch the presentation at the ICAEW annual conference.

Neil Stewart
Associate Director for the South

Q&A

Dominic Vincent
Associate Director for the North West

What is your legal background?
In October, I will have been qualified as a solicitor for 30 years. Over 25 of those years have been spent specialising in insolvency. A few years after completing my articles in London, I headed back north, arriving in Manchester in 2001 where I have been based ever since. In that time I have worked in private practice for several commercial firms before deciding my future lay in-house.

How long have you been at Manolete?
I joined Manolete in May 2018 and was the first recruit to be based outside of the London office. The company’s intention at the time was to develop its business into the regions. My role initially was effectively to be the regional director for 'outside London' but I am pleased this area has been refined over the years to be the north-west! I am delighted I now have colleagues who cover the whole of England, Scotland and Wales. Our regional footprint is now second to none and I am struck by the relationships between my colleagues and the numerous insolvency professionals in the UK. These relationships are the key to our success and growth.

What have been your main impressions?
Manolete has been instrumental in redefining the insolvency litigation market over the last 10 years or so. This is reflected in the number of times our name features in case reports. It is very satisfying that insolvency practitioners now find it more straightforward to pursue meritorious cases that perhaps would otherwise not have got off the ground. It is professionally very rewarding to be involved in this fast moving area of the law and it will be interesting see what the landscape looks like 10 years from now. On a macro level, working at Manolete allows you to apply your legal skills to the oversight and management of the investment we make in the legal cases we support. However on a micro level there is the daily delight at not having to fill in daily time recording sheets!

What are the other highlights?
As well as the legal work, my role at Manolete involves a fair amount of business development and marketing and I am always struck by the number of interesting people who work in insolvency. Manolete has taken me to many places I would otherwise never have visited: from the House of Lords, to the London Stock Exchange, to the Court of Appeal, not to mention our annual trips to Chester Races and the Bolton Beer Festival.

What do you do outside of work?
Family, and the three Ms – motorbikes, music and Manchester City FC.

Stephen Baister writes
Ten things you may not have known about insolvency

I rail against the modern tendency of contemporary journalists to produce silly lists instead of doing proper writing, but it’s a bank holiday weekend and I am feeling frivolous and lazy; so here are ten things you may or may not know or have heard about debt or bankruptcy or vaguely related matters.

1. Wiping the slate clean
The phrase “to wipe the slate clean” is usually said to date back to the time when people wrote a record of debts and credits on slate boards. Starting with a “clean slate” meant you wiped the board clean and had paid your debt. David Graeber in his book Debt: the first 5,000 years suggests, however, that the expression can be traced back to the Babylonians who kept records on tablets that could also be cleaned when a debt had been paid.

2. First winding up Act
The first law enabling a company or partnership to be wound up was The Joint Stock Companies Winding-Up Act 1844 (7 & 8 Vict c 111) which provided that a fiat in bankruptcy could be issued if a company failed and the bankruptcy would be treated in the same way as that of an individual.

3. Disqualifying directors
The power of the court to make a disqualification order prohibiting a person from being concerned in the management of a company was introduced by section 75 of the Companies Act 1928 (subsequently consolidated as section 275 of the Companies Act 1929) on the recommendation of the Report of the Company Law Amendment Committee (1925-1926) under the chairmanship of Mr Wilfrid Greene KC (Cmd 2657). Application for an order was to the court having jurisdiction to wind up the company and could be made by the official receiver or the liquidator or any creditor or contributory of the company. Except where there had been a conviction the power was limited to cases where it appeared in the course of a winding up that any business of the company had been carried on with intent to defraud and the maximum period for which a disqualification order could be made was five years. If you want to read more see the potted history in the opinion of Lord Millett in Official Receiver v Wadge Rapps & Hunt [2003] UKHL 49.

4. Accountants are magic
Insolvency is an area that involves a special relationship between the skills of accountants and lawyers. Insolvency practitioners know their insolvency law, and insolvency lawyers generally have some idea of how to read a set of accounts. But there has often been tension between the two disciplines. In a generally forgotten case decided by the Court of Appeal, Harrison-Broadley v Smith [1964] 1 WLR 456, Harman LJ (father of the recently deceased Harman J) noted that one of the parties “went to her accountant (I think I once said that accountants are the witchdoctors of the modern world and they appear indeed willing to turn their hands to any kind of magic) and he produced a very remarkable document called ‘Heads of Agreement,’” which did not impress the court. It’s probably as well if we all stick to what we know.

5. Last man hanged
The last person hanged in England for fraudulent bankruptcy was probably John Perrott in 1761 (although some academics claim there were other cases). The death penalty was abolished for post bankruptcy crime only in 1820.

6. Fenerate
The verb “fenerate” means to lend usuriously.

7. It’s a sin
Thomas Aquinas condemned it as a sin: “To take usury for the lending of money is in itself unjust, because it is a case of selling what is non-existent.” You can see his point. Financial services are now regularly offered on the basis of selling things that don’t exist. The Church found a loophole – obviously.

8. Fixed charge over a dog
Norris J’s judgment in In re Dent begins by framing one of the more unusual issues to be considered by the Chancery Division in modern times: “This application by the joint administrators of Dent Company (a partnership) affords the opportunity to consider the application of the equitable doctrines of marshalling and subrogation in relation to a fixed charge over a dog.” Read more in In re Dent Co (a partnership) (in administration); McLean and another v Berry and others [2017] 3 WLR if you feel so inclined.

9. Mr Registrar Brougham
James Rigg Brougham appears to have served as a bankruptcy registrar from 1848-1917, a record for that office.

10. It’s no joking matter
Hansard records Lord Mishcon saying in a debate in the House of Lords, “Insolvency is not a very thrilling or amusing subject.” He appears to be right about “amusing,” as I have never heard a decent insolvency joke. I once attended a conference at which Simeon Gilchrist proved the point by going through a number he had heard and demonstrating just how bad they were. And it wasn’t just the way he told them.

New joiner
Welcome to our new colleague

Wendy-Jay Jerome
Financial Analyst

Welcome to Wendy!

Wendy joined Manolete last month as a Financial Analyst after working for RSM Creditor Solutions LLP for 22 years. She specialised in personal insolvency and was an Associate Director in their bankruptcy team. Wendy has a keen interest in litigation of antecedent transactions and is using those investigation skills in Manolete’s Net Worth Team.

Case study
The Manolete Model in Action

Manolete is taking a further step towards knowledge sharing by launching a new initiative. We will be periodically releasing anonymised case studies that highlight the outstanding benefits of our unique model.

At Manolete, we firmly believe in showcasing the real impact and success stories behind our work. These anonymised case studies will shed light on the transformative power of our model, demonstrating a proven track record of achieving great outcomes in litigation. We breathe new life into insolvency legal claims, enabling insolvent estates to recover maximum value and achieve favourable settlements. With Manolete by your side, you can navigate the legal landscape with confidence and reap the rewards of our tailored approach.

Naturally, our success lies in our powerful partnerships with exceptional IPs and expert insolvency lawyers. Our significant financial strength frequently becomes the decisive factor, setting us apart from the rest.

Events
Manolete Main Sponsor for Contentious Insolvency and Creditors Forum

Manolete is delighted to be main sponsor for this important event. This Forum has been developed for practitioners with an interest or substantial practice in contentious aspects of insolvency and restructuring.

The aim is to bring together the communities of practitioners, solicitors, barristers, institutional creditors, non-performing loan funds, e-discovery specialists, investigators and litigation funders to network and hear the latest updates in the profession.

Date and time
6 July 2023

Location
11, Cavendish Sq.
London
W1G 0AN

Find out more