Manolete Partners PLC v Mohammed Jawed Karim & Ors

Directors must use company assets for proper corporate purposes and must genuinely consider the company’s interests. Where a company is insolvent or bordering on insolvency, creditor interests must also be considered, with increasing weight as financial distress worsens. A director cannot rely on inaccurate accounts, inadequate records or delegation to justify payments benefiting the director or connected persons.

For distributions, compliance with Companies Act 2006 Part 23 is mandatory. A distribution based on materially inaccurate accounts is unlawful. An innocent volunteer who gives no consideration for misappropriated company property has no defence to a proprietary claim once the property or its traceable product is identified.

Manolete Partners PLC, as assignee of claims belonging to Evershine Travel Ltd and its liquidators, brought claims against the company’s directors, connected persons and former solicitors. The claims concerned payments and transfers made before the company entered administration in January 2017, including alleged personal expenditure, loans, bonuses, dividends, payments to connected entities and payments to family members.

The defendants principally disputed liability, asserted that transactions were commercially justified or repayable through directors’ loan accounts, and raised limitation arguments. The Fourth Defendant, Mariam Karim, also disputed liability for payments made to her and resisted a late tracing amendment concerning £250,000 used towards a jointly owned property. The court determined the validity of the transactions, the directors’ duties, the dividend claims, limitation and the proposed amendment.

1. Disposition. Manolete succeeded on all claims pursued to trial. The court held that the directors and, where applicable, Mariam were liable to make repayment, compensation or proprietary relief. The parties were directed to agree an order, with costs and permission to appeal left for further determination.
2. Directors’ duties. The directors misapplied company assets for personal, family or connected-company benefit. Those transactions were outside the proper purposes of the power to deal with company property under section 171(b) of the Companies Act 2006. They also breached section 172 because there was no evidence of genuine consideration of the company’s interests and the transactions were objectively incapable of being regarded as beneficial to the company. The creditor duty was engaged because the company was insolvent or bordering on insolvency from 2012 and commercially insolvent, or bordering on commercial insolvency, from autumn 2014.
3. The directors further breached sections 173 and 174. They failed to exercise independent judgment and failed to take reasonable care, skill and diligence in managing and safeguarding company assets. The absence of proper records could not assist them in explaining payments.
4. Dividends. The payments recorded as dividends were unlawful. The statutory process under Part 23 had not been followed, and the relevant accounts materially misstated the company’s assets and distributable reserves. The directors were liable under their duties and section 847; the recipient-shareholder liability also applied because they knew, or had reasonable grounds to believe, the distributions were unlawful.
5. Tracing and amendment. Permission was granted to amend the claim to trace £245,139 into the jointly owned property. The late amendment caused no material prejudice and was justified by the evidence first disclosed in Mariam’s trial statement. Because Mariam gave no consideration, she was not a bona fide purchaser for value. Once the misapplication was established and the money or its traceable product identified, she had no defence to the proprietary claim. Independent Trustee Service Ltd v GP Noble Trustee Ltd was applied.
6. Limitation. None of the claims was time-barred. The debt and equitable-account claims, the fiduciary claims and the deliberate concealment provisions of section 32 of the Limitation Act 1980 prevented the limitation defence from succeeding.