MANOLETE PARTNERS PLC v ALEX DAVID HOPE & Anor

A court may limit recoveries in misfeasance proceedings where the governing statutory discretion permits it, particularly to prevent persons tainted by the wrongdoing from receiving a surplus. That discretion is distinct from the underlying cause of action and from the assignee’s right to pursue it. Where a liquidator has properly assigned claims to an innocent funder or assignee on terms sharing the recoveries, the discretion should not ordinarily be exercised to deprive that assignee of its agreed share. The question whether such a limitation can follow an assignment by a liquidator should be decided only where necessary and with all materially interested parties before the court.

The respondents, former directors and shareholders of P G D Ltd, caused the company to make payments to them in connection with the sale of their shares and to pay unlawful dividends. After the company entered liquidation, its claims against the respondents were assigned to Manolete Partners PLC on terms under which recoveries were shared with the insolvent estate.

The Insolvency and Companies Court found the respondents liable for unlawful dividends, breach of duty and transactions at an undervalue. After judgment, the judge imposed a proviso capping recoveries so that the liquidation would not become solvent and permit a distribution to the company’s shareholders. Manolete appealed against that proviso. The central issues were whether the judge had jurisdiction to impose it and, if so, whether it could operate to prejudice the innocent assignee.

1. Appeal allowed. The proviso limiting the respondents’ total liability was wrongly imposed.
2. The first-instance judge had already determined the appropriate relief and quantum for the causes of action. The proviso was not based on the causes of action, the measure of compensation, or a defence available to the respondents.
3. The authorities identified by the appellant showed that the relevant discretion to limit recoveries was exercised under Insolvency Act 1986, section 212, or predecessor provisions. Section 212 was not available on the present facts because the proceedings were not brought by a person specified in section 212(3). The court nevertheless left open the broader question whether, following an assignment by a liquidator, recoveries might in an appropriate case be limited by reference or analogy to section 212.
4. The principle that an assignee stands in the shoes of the assignor means that the assignee acquires no better cause of action. It does not justify imposing a limitation concerned only with the destination of the proceeds of the cause of action.
5. The rationale for the discretion was to prevent persons tainted by the wrongdoing from receiving part of the proceeds. It could not properly be exercised to prejudice an innocent assignee whose contractual entitlement to share recoveries formed part of the price paid for the insolvent estate’s exploitation of the claims. The same reasoning applied to innocent creditors or expense-payees.
6. It was unnecessary to determine the other grounds of appeal or the wider jurisdictional question.

• Chancery Appeals (ChD): The appeal from the Insolvency and Companies List was allowed. The proviso limiting recoveries was set aside.
• Insolvency and Companies List (ChD): Insolvency and Companies Court Judge Prentis found the respondents liable for unlawful dividends, breach of duty and transactions at an undervalue, and subsequently imposed the proviso.