Manolete Partners Plc v Austin Bell & Ors

Where a company is insolvent or likely to enter insolvent liquidation, a director must give proper consideration to the interests of creditors. The duty is assessed subjectively by reference to the director’s actual belief, but an objective approach applies where there is no evidence that the interests of the company or creditors were considered, or where a material creditor interest was unreasonably overlooked. Transactions which remove assets or funds from an insolvent company for the benefit of a connected business may breach that duty. Payments to connected persons may also constitute preferences under Insolvency Act 1986. A transaction at an undervalue may attract restorative or compensatory relief under section 238.

Manolete Partners plc, as assignee of causes of action belonging to the liquidator of BSS LED [R&D] Limited, brought a hybrid Part 7 claim and an application under section 238 of the Insolvency Act 1986. The claim concerned alleged breaches by Steven Bell of his duties as director after BSS became insolvent, including asset transfers, payments to connected companies and individuals, unrecovered property, and expenditure incurred after cessation of trade.

The section 238 application also concerned alleged transactions at an undervalue. Claims against Austin and Christian Bell were settled, and Engineering was debarred from defending the application. The issues for determination included the date of BSS’s insolvency, whether it had ceased trading by the end of October 2018, whether assets and payments were improperly transferred, and the compensation payable.

1. Claim succeeded. Judgment was entered against Steven Bell for the total sum claimed, save for the abandoned parts of the claim concerning Christian Bell. Interest and consequential matters were reserved.
2. BSS was insolvent by the beginning of April 2018. Its inability to pay rent and ordinary liabilities, returned direct debits, persistent overdrafts and rapid exhaustion of emergency funding established insolvency.
3. BSS had ceased trading by the end of October 2018. The subsequent receipts were residual payments and did not establish continuing business activity.
4. The director’s duty to consider creditors’ interests was engaged. Although the ordinary approach is subjective, an objective test applies where there is no evidence of actual consideration of the company’s or creditors’ interests, or where a material creditor interest was unreasonably ignored. The court applied the principles stated in Regentcrest plc (in liq) v Cohen & Anor [2001] BCC 494, HLC Environmental Projects Ltd (in liq.) [2013] EWHC 2876 (Ch) and BTI v Sequana [2022] UKSC 25.
5. The sale of equipment to Engineering was at an undervalue of £65,000. The equipment was worth at least approximately £120,000, and the sale occurred while BSS was insolvent and while Bell failed to take proper account of creditors’ interests.
6. Transfers to Manufacturing, the transfer of stock and equipment without payment, foreign travel and exchange expenditure, payments to Bell, the unrecovered technology, advances to BSS Australia, and payment of Austin’s university fees were breaches of duty. The payments to Manufacturing would alternatively amount to preferences, with the requisite desire presumed because Manufacturing was connected with BSS.
7. Bell was liable to compensate BSS in the amounts claimed for the established breaches.