The recent High Court judgment in Manolete Partners plc v Norman Freed & Ors [2024] EWHC 2242 (Ch) provides useful clarification to office-holders (and assignees of claims), as to when they will be entitled to pursue the full amount of losses - rather than limiting claims to the shortfall in the relevant estate.
Background
On 19 July 2022, Manolette Partners plc (“Manolete”) issued proceedings against Norman Freed, Key People Limited (“KPL”) and Achieva Group Limited (“AGL”), having taken an assignment of the relevant claims from the administrators of Just Recruit Group Limited (“JRGL”).
Manolete alleged that Mr Freed, as a director of JRGL, caused payments to be made to KPL and AGL of £240,000 and £678,590.18. Following their appointment, the administrators became aware of these payments, and assigned their relevant causes of action to Manolete.
Manolete commenced proceedings (i) seeking equitable compensation against Mr Freed for £918,590 for breach of duty in causing the payments to be made, and (ii) advancing claims against KPL and AGL under s. 238 and 239 of the Insolvency Act 1986, on the basis the payments were made at an undervalue and/or constituted preferences.
The Defendants denied liability, and further argued that to the extent they were found liable, any liability should be limited to the sums necessary to meet the shortfall in the administration (in the region of £350,000, versus the £918,590 total claimed).
The Defendants argued that the quantum ought to be properly limited to the shortfall on the basis that there would otherwise be circularity, in that the only (or only significant) creditor was KPL.
Manolete contended that there was no such circularity and that if indeed KPL could demonstrate that it was a proper creditor, it would be entitled to prove in the liquidation in the normal way, but this should not affect its liability in the proceedings.
Judgment
The court dismissed the Defendants’ argument that their liability should be limited to the shortfall in the estate.
In doing so, ICC Judge Mullen noted that: “The question is whether, in framing relief, the court should restrict its recovery […] aside from pointing to the cases on assignment and the broad principle that an assignee cannot claim more than his assignor, which is not in fact of application here, the respondents have pointed to nothing to identify a principle that recovery should be so capped in these circumstances”
ICC Judge Mullen accepted that in the case of claims brought by office-holders, the payment of recoveries in the estate may result in a return being made to a defendant as a creditor or shareholder, and that this might in principle justify a limitation being imposed, observing:
“I can see that in a clear cut case where there is no doubt as to the assets and liabilities of the company and one can say with some certainty that the defendant will simply receive back a proportion of a sum that they might otherwise be ordered to repay it might be appropriate to restrict recovery so as to prevent a “money-go-round” if there is no prejudice to other creditors.”
However, ICC Judge Mullen found this was not such a case.
Firstly, ICC Judge Mullen accepted that there was no true circularity, in the sense of a “money-go-around”. Neither Mr Freed, nor AGL were creditors of JRGL. While KPL did have a prospective claim, there were also other shareholders, who would be prejudiced by the imposition of such a limitation.
The court further observed that limiting the recoveries would prejudice Manolete, as an innocent third-party purchaser of the claims, and that such a finding would discourage potential purchasers of claims.
ICC Judge Mullen accordingly declined to exercise any discretion to limit recovery.
Comment
This case provides useful guidance and clarification to office-holders and assignees of claims, as to the risk of recoveries being limited to the shortfall in the relevant estate.
The judgment confirms that the starting point will be that such claimants should be entitled to pursue their losses in full, and that recoveries should be dealt with in the administration of the estate in the normal way. Compelling evidence of a complete “money-go-round”, without prejudice to other creditors, will be required before the court will look to exercise discretion to limit recoveries.
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