Manolete Partners PLC v Hope

The principal legal issue was whether the judge below was entitled to include a proviso capping recoveries so as to prevent any distribution to the companys shareholders if payment under the judgment would render the liquidation solvent. The judges intervention was treated as an exercise of a discretionary power of the kind found in s.212 of the Insolvency Act 1986 or its predecessors. The Court of Appeal (Zacaroli J) held that the proviso was wrongly imposed because it prejudiced an innocent assignee of the claims (Manolete Partners PLC) by reducing the proceeds that the assignee was contractually entitled to keep, and because the rationale for the discretion is to prevent proceeds passing to those tainted by the wrongdoing rather than to deprive innocent third parties of agreed shares of recoveries.

The judgment therefore allowed the appeal and removed the proviso, concluding that it was wrong in principle to deprive an assignee of part of the proceeds obtained by assignment where the assignee was innocent of the defendants' wrongdoing. The court did not finally decide the broader question of whether a cap of this kind can be imposed after assignment in all circumstances, leaving that for a case in which the point is fully argued by the relevant parties.

This was an appeal from the Insolvency and Companies List (ChD) concerning claims arising from a 2014 transaction by which two directors and shareholders sold their shares in P G D Limited. The sale had been financed, in substance, by the company itself. Payments and dividends made to the respondents gave rise to claims for unlawful dividends, breach of duty, transaction at an undervalue and voidable preference. The company went into liquidation and, because of lack of estate funds, the company and the liquidator assigned their claims to Manolete Partners PLC (MPP) on terms under which MPP paid an upfront sum and was contractually entitled to retain a proportion of net recoveries.

The judge at first instance (Prentis J) found a variety of liabilities against the respondents and, after judgment was handed down, proposed a proviso limiting total recoveries so that payment under the order would not produce any return to the companys shareholders (the Buyers) if the liquidation became solvent. That proviso was not pleaded and was formulated post-judgment. MPP appealed with permission granted by Joanna Smith J on 23 March 2022. The Court heard argument (the respondents did not appear) and admitted an unredacted assignment agreement as new evidence because the proviso was only mooted after the first judgment.

The court framed the legal questions as (i) whether the judge had jurisdiction to impose the cap (the Proviso) and, if so, (ii) whether it was right to exercise it in a way that prejudiced an innocent assignee. The appellant contended that the only established source of such a discretion was s.212 of the Insolvency Act 1986 (or predecessor provisions), which empowers the court, on certain applications by a liquidator, official receiver, creditor or contributory, to compel repayment or contribution; and that s.212 did not apply because MPP (the claimant) was neither a liquidator nor a creditor nor a contributory and no s.212 claims had been assigned in a way to permit such an exercise in the present circumstances. The court reviewed prior authorities in which limits on recoveries had been imposed but observed that in those cases the discretion was exercised under s.212 or equivalent provisions and by parties entitled to invoke it.

Assuming, arguendo, a jurisdiction to exercise such a discretion after assignment, the court held that the judge was wrong to deprive MPP of part of the contractual share of recoveries. The rationale for limiting recoveries is to prevent tainted persons obtaining proceeds; it is not to penalise innocent assignees or creditors. An assignee stands in the shoes of the assignor as to causes of action, but the judges cap affected the distribution of proceeds rather than the cause of action itself, and therefore it should not have been exercised so as to deprive an innocent third party of agreed recoveries. The court therefore allowed the appeal, removed the Proviso and did not decide the broader jurisdictional question, leaving that for a suitably contested case.

This was an appeal allowed. The judge below erred in imposing a proviso capping recoveries to prevent any return to the companys shareholders where that cap would prejudice an innocent assignee (MPP) who had been contractually entitled to a share of recoveries. The court concluded it was wrong in principle to deprive such an assignee of part of the proceeds by exercising a discretion intended to prevent tainted parties receiving proceeds; the appeal was therefore allowed and the Proviso removed. The broader question whether such a cap can be imposed post-assignment in all circumstances was left undecided.

Appeal to the High Court, Chancery Appeals (ChD) from a judgment of the Insolvency and Companies List (ChD) (first instance judgment delivered 22 November 2021 by Insolvency and Companies Court Judge Prentis). Permission to appeal granted by Joanna Smith J on 23 March 2022. Hearing before Zacaroli J on 10 June 2022; judgment handed down 14 July 2022 ([2022] EWHC 1801 (Ch)).