MANOLETE PARTNERS PLC v CLIFFORD NORMAN SMITH

The court considered claims brought by the liquidator (assigned to Manolete Partners plc) against the de jure director, Mr Clifford Smith, and alleged de facto/shadow director, Mr Charles Dartmouth, together with Charles Dartmouth Ltd (CDL), in respect of payments made by two insolvent companies, City Build (London) Ltd and ISS London Ltd, between September 2013 and September 2015. Key legal issues were whether Mr Dartmouth was a de facto or shadow director (Companies Act 2006 s.251 and related authorities), whether specified payments within two years of liquidation were transactions at an undervalue under section 238 of the Insolvency Act 1986, and whether Mr Smith should be ordered to make compensation under the court's powers for breach of directors' duties.

The judge applied established tests for de facto and shadow directorship (including guidance in Smithton v Naggar) and emphasised that the claimant bore the evidential burden of proving that Mr Dartmouth assumed the status and functions of a director or that the directors acted in accordance with his directions. The court found a striking absence of contemporaneous company records and noted the adverse effect of the respondents' health and memory difficulties on the evidential picture. On the balance of probabilities the applicant failed to prove that Mr Dartmouth was a de facto or shadow director. The court further held that the applicant had not proved that the two‑year payments were, in law, transactions at an undervalue under s.238: whilst insolvency was presumed as the recipients were connected parties, evidence was insufficient to show lack or insufficiency of consideration for the payments. Finally, the court declined to order compensation against Mr Smith: there was no evidence of personal benefit, his lack of recollection (affected by dementia) and the absence of documents made it impossible to quantify a just compensatory sum. The application was dismissed.

This was a first instance trial of an application by Manolete Partners plc as assignee of a liquidator's claims in relation to City Build (London) Ltd and ISS London Ltd. The applicant sought (i) damages or equitable compensation against Mr Smith for breaches of directors' duties and/or breach of trust in causing or acquiescing in payments made by the companies, and (ii) declarations and consequential relief that payments post‑dating 6 November 2013 to Mr Dartmouth and/or Charles Dartmouth Ltd were transactions at an undervalue under section 238 of the Insolvency Act 1986.

The issues the court framed and decided were:

• Whether Mr Dartmouth acted as a de facto director or was a shadow director of the companies so as to attract liability for breach of directors' duties (Companies Act 2006 provisions and common law principles).
• Whether the payments within two years of liquidation were transactions at an undervalue under s.238 IA 1986 and, if so, what remedies should follow.
• Whether Mr Smith should be ordered to make compensation for breach of duty, and whether any statutory defence (including s.1157 CA 2006) or other factors removed or reduced his liability.

The court summarised the factual background: the companies operated closely with Charles Dartmouth Ltd, shared premises and staff, and made numerous payments to Mr Dartmouth and/or CDL totalling £1,685,007.40, of which £1,376,747.19 fell within two years of liquidation (the TUV Payments). Contemporaneous books and records were scarce and the respondents suffered from cognitive impairment, which affected the weight to be placed on their evidence.

On the de facto/shadow director issue the judge applied authorities including Smithton v Naggar, Re Gemma Ltd and Re Richborough, stressing that it is for the applicant to prove that a person assumed the status and functions of a director or that the directors were accustomed to act in accordance with the person's instructions. The judge found that, although the respondents' accounts lacked credibility in parts and cooperation with the liquidator was poor, the available evidence did not establish that Mr Dartmouth had assumed directorial functions or had exercised real influence over corporate governance. The concepts of consultation and cooperative working across related companies, or being kept informed, fell short of the required standard.

On the transactions at an undervalue issue the court accepted that connection between CDL and the companies gave rise to a statutory presumption of insolvency for s.238 purposes, but held that the applicant bore the burden of proving the absence or inadequacy of consideration. The paucity of documents meant the applicant had not proved that the TUV Payments were gifts or that consideration was significantly less than the payments. Some contemporaneous invoices suggested there had been a course of dealings between the entities and it was more likely than not that at least some payments were made in respect of services; therefore the applicant had not proved s.238 liability.

On the claim against Mr Smith for breach of duty, the court noted that he did not actively defend the claim, accepted that ignorance of duties is no defence, and that there was no assertion of dishonesty. The judge concluded there was insufficient evidence to satisfy the statutory relief test under s.1157 CA 2006 (honest and reasonable conduct) or to quantify any compensatory remedy under section 212 of the Insolvency Act, particularly in light of the absence of records and the impossibility of distinguishing legitimate from illegitimate payments.

Accordingly the application was dismissed. The judgment emphasised the evidential difficulties caused by missing documentation and by the respondents' cognitive impairment and cautioned against drawing adverse inferences where the applicant had not proved lack of consideration for each payment.

The application is dismissed. The court found that the applicant failed to prove that Mr Dartmouth was a de facto or shadow director of the companies and failed to prove that the payments within two years of liquidation were transactions at an undervalue under section 238 IA 1986. The court also declined to order compensation from Mr Smith because there was insufficient evidence to identify illegitimate payments or to quantify a fair award, the absence of dishonesty, and his inability to explain the payments (affected by health) meant the statutory relief and assessment of compensation could not be justly made.