Manolete Partners Plc v Freed & Ors - Stephen Baister Summary
ICC Judge Mullen’s judgment in Manolete Partners plc v Freed & Ors (Re Just Recruit Group Ltd - Insolvency Act 1986) [2024] EWHC 2242 (Ch) follows claims made by Manolete Partners Plc as the assignee of Miles Needham and Simon Carvill-Biggs, the joint administrators of Just Recruit Group Limited.
In essence, the claim was that Mr Freed, as director of the company, had caused it to make payments in breach of duties he owed the company under ss 170-179 Companies Act 2006, in particular in breach of his duty to consider or act in the interests of the company’s creditors at a time when he knew, or ought to have known, that it was, or was likely to become, insolvent.
Equitable compensation was sought against Mr Freed for the payments he caused to be made alongside other relief against associated companies which had been the recipients of the payments. ICC Judge Mullen granted the relief sought but, as he put it, “[s]ubject to the question of whether recovery should be limited to the shortfall in the administration.” It is the approach he took to that question that is of interest (see para. 122 of his judgment under the heading “Limitation to shortfall and ‘circularity’”).
The defendants (Mr Freed and the companies associated with him that had received the improper payments) had pleaded that their liability should be limited to the shortfall in the administration. In particular, they sought to undermine the effect of the decision in Manolete Partners plc v Hope [2022] EWHC 1801 (Ch), relying on the fact that it had been decided without representation from the respondents to the appeal and submitting that it was a decision of a court of co-ordinate jurisdiction and was therefore not binding precedent. The defendants also pleaded that the proceedings were “circular, in that the only (alternatively, only significant) creditor of the company [was] the Second Defendant” so that any order requiring the defendants to pay any sum should be limited to the true deficiency in the administration.
The claimant joined issue in its reply, asserting the correctness of the decision in Manolete v Hope and rejecting the “circularity” claim:
“[C]ontrary to what is said in…the defence, there is no ‘circularity’ to this claim. If the second Defendant can demonstrate that it is a creditor of the Company, then it will be entitled to prove in the liquidation and, in those circumstances, may benefit from a distribution to creditors. That does not affect its liability in these proceedings.”
Since much of the argument before Judge Mullen turned on the decision in Manolete v Hope it would be as well to recall what that case was about. In brief, it was a claim, again by Manolete as assignee of an office-holder, against the directors and shareholders of a company called PGD Ltd. It concerned the sale of the respondents’ shares using company funds and the payment of unlawful dividends.
At first instance, the respondents were found liable, but ICC Judge Prentis limited recovery to “the amount required to pay off all liquidation debts, fees, remuneration and expenses, together with applicable interest, in full and without return being made to the members of the Company as such.”
The purpose of that proviso in the judge’s order was to prevent a distribution to the buyers of the shares who had participated in the wrongful sale. In imposing it, the judge also noted that the respondents should not be required to pay more than they would have had to pay if the claim had been brought by the liquidator rather than after having being assigned to Manolete.
Manolete appealed. The appeal was allowed by Zacaroli J, as he then was. He took the view that the only jurisdictional basis for imposing the proviso could have been s. 212 Insolvency Act, which was not available in the case of an assignment of claims to a third party. He also held that the imposition of the proviso was wrong for other reasons, not least because of practical difficulties in implementing it.
ICC Judge Mullen rejected the submission that he was not bound by Manolete v Hope:
“[A] judgment of a High Court Judge exercising an appellate jurisdiction is binding on me, by analogy with the observations of Mr David Foxton QC, as he then was, sitting as a Deputy High Court Judge in Coral Reef Ltd v Silverbond Enterprises Ltd […]. Those observations were obiter but, if I may respectfully say so, plainly right.”
He rejected submissions to the effect that Manolete v Hope conflicted with or was inconsistent with the decisions of the Court of Appeal in Dawson v Great Northern and City Railway Company, one of a number of decisions, it was said, not cited to Zacaroli J, and Darlington Borough Council v Wiltshier Northern Ltd. He also examined the decision of Snowden J, as he then was, in Re Totalbrand. Drawing on the policy considerations identified in that case, including the public interest in upholding standards of corporate behaviour, he expressed the view that limiting recovery might discourage the pursuit of claims of exactly the kind the reform enabling assignment of office-holder claims had been designed to encourage (see s. 246ZD Insolvency Act 1986).
He rejected the claim that recovery in this case gave rise to the kind of “circularity” that was the subject of consideration in Re Care Community Limited:
“Where, as in that case, there is an almost complete identity between the respondents and the creditors there is the risk of a ‘money-go-round’, where the recovered monies simply end up back in the pockets of the paying parties. That is not the case here. Neither Mr Freed nor AGL claims to be a creditor of JRGL. KPL has not proved in the administration but might have a claim to the surplus in its capacity as a shareholder. It is accepted to be a shareholder but there are three others, being Mr Atherton and Mr and Mrs Neto.”
Finally, he said that he would not exercise his discretion to assist the defendants:
“In my judgment Mr Willson [counsel for Manolete] is correct in his submissions. Assuming that I have a discretion to limit recovery as suggested by the Defendants I would decline to do so. The payments ought not to have been made and my starting point is that the Defendants should meet the loss caused in full. Certainly in the case of the claims under section 238 and 239 IA 1986 the purpose is to permit recovery of property that should not have been paid away. Similarly, in the case of the breach of duty the court must consider what the consequence of the breach of duty would be. This is a misappropriation case and the general principle is that the aim is to restore the property wrongly paid away (see Davies v Ford […]). The consequence of the breach of duty is that payments that should not have been made were made. Again, on the face of it the starting point is that Mr Freed is liable for the whole loss caused.”
The judge was also influenced in that view by what he described as “a lack of candour on the part of the director and controlling mind of the recipient companies as to the insolvent company's affairs.”
Mr Freed was ordered to pay equitable compensation in the sum of £918,590 for the loss caused to the company by his breach of duty and two entities that had benefitted from wrongful payments made to them were held jointly and severally liable with Mr Freed for the sums of £240,000 and £678,590 respectively.
The full judgment can be read here:
https://southsquare.com/wp-content/uploads/2024/08/Just-Recruit-Group-Limited-approved-judgment.pdf