Manolete Partners PLC v Mohammed Jawed Karim & Ors

The court found that Manolete, as assignee of claims of Evershine Travel Limited and its liquidators, succeeded in demonstrating that directors caused or permitted extensive disposals of company assets for purposes unconnected with the company's business, in breach of fiduciary duties and statutory duties under the Companies Act 2006 (in particular sections 171, 172, 173 and 174) and in circumstances where the company was insolvent or bordering on insolvency. The judge concluded that numerous transactions (including payments to African mining ventures, transfers to ATISL and COR Clearing, cash and cheque withdrawals, credit-card payments, alleged bonuses, and payments to related persons and third parties) were improperly made and gave rise to recoverable debts or equitable proprietary remedies.

The court also held that several dividends were unlawful under Part 23 of the Companies Act 2006 and thus recoverable. A tracing claim into a property purchased jointly by a director and his wife was permitted and the claimant was given leave to amend to pursue that proprietary remedy; the wife (Mariam) was held liable to account for £58,100 and was vulnerable to the tracing claim in respect of £245,139 used towards the property. The court rejected limitation defences, applying section 32 of the Limitation Act 1980 and related principles.

Background and parties. This first-instance claim was brought by Manolete Partners PLC as the assignee of Evershine Travel Limited’s and its liquidators’ claims. The defendants included three director-shareholders of the company (Jawed, Basser and Fahim), family members (including Mariam and Anna), and the company’s former solicitors. The company, a car rental consolidator and tour operator, entered administration on 19 January 2017 and creditors faced a substantial shortfall.

Nature of the claim and relief sought. Manolete sought repayment and equitable compensation in respect of numerous transactions said to have misapplied company assets; declarations and proprietary remedies (including tracing into a house purchase); recovery of unlawful dividends under Part 23 of the Companies Act 2006; and ancillary relief. The claimant advanced causes of action in breach of statutory duties (sections 171, 172, 173 and 174 CA 2006), fiduciary breach, unlawful distributions, restitution/unconscionable receipt and tracing of trust property. It also advanced alternative insolvency-based remedies (preferences/transactions at undervalue under the Insolvency Act 1986).

Issues for determination.

• whether the company was insolvent or bordering on insolvency and when;
• whether specific payments and transfers (African mining payments, transfers to ATISL/COR Clearing, cash withdrawals, credit-card payments, bonuses, payments to relatives and third parties, payments to solicitors) were for proper company purposes or were misapplications of company assets;
• whether dividends paid in 2014–2015 were unlawful under Part 23 and recoverable;
• whether the directors breached duties under the Companies Act 2006 and fiduciary duties;
• whether Manolete could trace sums into property purchased by a director and his wife and whether the wife had a defence (bona fide purchaser for value) or had unconscionably retained funds;
• whether limitation defences barred any claims.

Court’s reasoning and findings. The judge primarily relied on documentary evidence and the liquidators’ witness; the principal directors did not attend trial. On the accounts and contemporaneous documents the court concluded that material alleged debtor-assets were not realisable and the accounts materially overstated assets, such that the company was balance-sheet insolvent from about 2012 and commercially insolvent from autumn 2014. Many payments were held to have been made for the personal benefit of directors or related persons and lacked documentary or commercial justification. The payments to ATISL and through the US clearing house were not supported by adequate inter-company accounting. Bonus payments were not supported by contemporaneous corporate approvals and appeared to have been retrospectively documented. The dividends were not shown to have complied with Part 23 and were unlawful and recoverable. Mariam’s evidence was extensively considered; the court found her retention of £58,100 unconscionable and allowed amendment to pursue tracing of £245,139 into a jointly owned property. Limitation defences failed: claims were within time because (inter alia) sums were repayable on demand, equitable accounting claims lacked a limitation bar, and section 32 of the Limitation Act 1980 delayed the start of limitations until the date of administration.

Other procedure points. The court granted permission to amend pleadings late in the proceedings to add the tracing claim, applying the usual multi-factorial approach to amendments and finding no substantial prejudice. The judge indicated he would receive proposed orders from counsel to reflect the findings.

The claim succeeded. The court held that Manolete established that the directors had caused or permitted widespread misapplication of the company’s assets in breach of fiduciary and statutory duties (sections 171, 172, 173 and 174 Companies Act 2006), that certain dividends were unlawful under Part 23 and recoverable, and that proprietary remedies (including tracing into the joint property) were available. The court allowed a late amendment to pursue tracing into the house and rejected limitation defences, applying section 32 Limitation Act 1980 and related principles. Relief was to be ordered in favour of Manolete on the claims pursued at trial.