Manolete Partners PLC v Norman Freed & Ors

Where a company is insolvent, or probably about to enter an insolvency procedure, directors must consider and act in the interests of creditors. Those interests are paramount. A director cannot justify payments to connected companies by relying on unproved intercompany arrangements, informal approval, or an alleged intention to pay all creditors.

Payments made to connected persons may constitute transactions at an undervalue where no consideration is established. They may alternatively amount to preferences, with the statutory presumptions applying where the relevant conditions are met. A director who deliberately or unreasonably transfers company assets in those circumstances may be liable for breach of duty, and the recipients may be liable in knowing receipt.

Where insolvency claims have been assigned, recovery will not ordinarily be capped at the administration shortfall merely because a defendant may later benefit as a creditor or shareholder.

Manolete Partners PLC, as assignee of claims belonging to the administrators of Just Recruit Group Limited, brought consolidated proceedings against Norman Freed, Key People Limited and Achieva Group Limited.

The claims concerned payments made by Just Recruit to KPL and AGL shortly before its administration. Manolete alleged breach of directors’ duties, transactions at an undervalue, preferences and knowing receipt. The defendants contended that the payments discharged genuine intercompany liabilities, supported creditors and should, in any event, be limited to the administration shortfall.

The central issues were whether the recipients were connected with Just Recruit, whether the payments had consideration or constituted preferences, whether Mr Freed breached the creditor duty, and whether recovery should be restricted because of alleged circularity.

1. Liability. Mr Freed was liable for equitable compensation of £918,590. KPL was jointly and severally liable for £240,000 and AGL for £678,590. The recipients were also liable under sections 238 and 239 of the Insolvency Act 1986, alternatively in knowing receipt.
2. Connection and control. KPL and AGL were connected with Just Recruit under section 249 and section 435 of the Insolvency Act 1986. Mr Freed was their controlling mind. The evidence did not establish that Moshe Freed directed the payments.
3. Transactions at an undervalue. No credible evidence established the alleged quarterly services, invoices, agency arrangements or repayment obligations. The KPL and AGL payments were therefore made for no consideration. They fell within the relevant statutory periods, and the statutory presumptions of insolvency applied. The payments were not saved by the good-faith and business-benefit exception.
4. Preferences. Alternatively, the payments were preferences. Just Recruit was insolvent when the payments were made, and the recipients were connected persons. The desire to prefer was presumed. Even without the presumption, the evidence established that connected entities received substantial sums while unconnected creditors remained unpaid.
5. Directors’ duty. The company was insolvent by October 2020, or at least probably about to enter an insolvency procedure. The interests of creditors were therefore paramount. The transfers conferred no benefit on Just Recruit or its creditors and were made without proper purpose. The ratification defence failed because there was no evidence that shareholders addressed the breach and shareholders could not ratify a breach of the creditor duty while the company was insolvent or became insolvent as a result. Relief under section 1157 of the Companies Act 2006 was refused because Mr Freed had not acted honestly or reasonably.
6. Shortfall and circularity. The court declined to cap recovery at the estimated administration shortfall. The assigned causes of action were pursued as assigned, and the defendants identified no principle requiring a cap. Full recovery would allow the proceeds to be dealt with in the administration after the company’s assets and liabilities were properly established. The claim did not involve the near-complete identity between wrongdoers and creditors found in cases concerning a true money-go-round.