MANOLETE PARTNERS PLC v CLIFFORD NORMAN SMITH

A person is not a de facto director merely because the formally appointed director consults them, seeks their approval, or works cooperatively with them. The court must assess what the person actually did, viewed objectively and cumulatively, and decide whether they assumed the status and functions of a director and exercised real influence over corporate governance. A shadow director requires evidence that the company’s directors were accustomed to act in accordance with that person’s directions or instructions.

In a transaction-at-undervalue claim, the applicant must prove both the transaction and the absence, or inadequacy, of consideration. Unexplained payments and poor records may raise suspicion but do not by themselves discharge that burden.

Manolete Partners plc, as assignee of claims by the liquidator of City Build (London) Ltd and ISS London Ltd, brought proceedings against Clifford Smith, Charles Dartmouth and Charles Dartmouth Ltd. It alleged that Mr Smith and Mr Dartmouth had breached directors’ duties by causing or acquiescing in payments to Mr Dartmouth and CDL, and that payments made after 6 November 2013 were transactions at an undervalue under the Insolvency Act 1986.

The central issues were whether Mr Dartmouth was a de facto or shadow director, whether the payments were transactions at an undervalue, and whether Mr Smith was liable for misfeasance or compensation.

1. Mr Dartmouth’s status. The applicant bore the burden of proving that Mr Dartmouth was a de facto or shadow director. The court applied the guidance in Smithton v Naggar and Re Gemma Ltd (in liquidation). The relevant inquiry was factual and objective, concerned with the acts actually performed, their cumulative effect, and the company’s corporate governance structure.
2. Mr Dartmouth’s shareholding history, bank mandate, debit card, involvement in discussions and cooperative relationship with Mr Smith did not establish that he assumed the status and functions of a director or exercised real influence over the Companies’ corporate governance. Consultation and agreement were insufficient. There was also no adequate evidence that Mr Smith was accustomed to act on Mr Dartmouth’s directions or instructions. The claims against Mr Dartmouth for breach of directors’ duties therefore failed.
3. Transactions at an undervalue. Under section 238 of the Insolvency Act 1986, the applicant had to prove that the Companies entered into transactions for no consideration or for consideration significantly less than the value provided. Although insolvency was presumed because the recipients were connected parties, that presumption did not establish undervalue. Unexplained payments and failures to provide records raised suspicion but did not shift the legal burden. The evidence showed a probable course of dealings between the Companies, CDL and Keltbray, but did not establish the consideration for each payment.
4. Mr Smith. The applicant established that the payments were made, placing on Mr Smith the burden of showing a legitimate business purpose. His inability to explain them meant that the statutory defence in section 1157 of the Companies Act 2006 was not engaged. Nevertheless, there was no evidence that he personally benefited, no submission that he acted unreasonably, and no reasonable basis for identifying which payments were improper. The court therefore exercised its discretion under section 212 of the Insolvency Act 1986 against ordering compensation.
5. The application was dismissed.

First-instance trial in the High Court. The application had been amended by order dated 5 March 2021 to add claims against Charles Dartmouth as an alleged de facto or shadow director.