Manolete Partners PLC v Norman Freed & Ors

The court found that the payments made by Just Recruit Group Limited (JRGL) to Key People Limited (KPL) and Achieva Group Limited (AGL) in the period October to December 2020 were improper transfers made when JRGL was insolvent or on the verge of insolvency. The transfers lacked consideration and/or constituted preferences and transactions at an undervalue within the meaning of the Insolvency Act 1986 (notably ss.238–240 and 241). The judge concluded that Mr Norman Freed, as the controlling mind of JRGL and the recipient companies, breached duties owed to the company and to creditors preserved under section 172(3) Companies Act 2006 and was liable to equitable compensation. KPL and AGL were ordered to account for the sums received, alternatively held liable for knowing receipt. The court rejected arguments that the payments were ratified, that relief under section 1157 CA 2006 should be granted, and that any recovery should be capped at the administration shortfall. The judge made detailed findings on the evidence, concluding that Mr Freed was the principal decision-maker, that the defendants failed to prove consideration, and that the administrators were not responsible for the undisclosed liabilities.

This was a first-instance consolidated claim and insolvency application brought by Manolete Partners plc as assignee of the joint administrators of Just Recruit Group Limited (JRGL). Manolete sought recovery of payments totalling £918,590 made by JRGL between 9 October and 24 December 2020: £240,000 to Key People Limited and £678,590.18 to Achieva Group Limited. The claims pleaded included transactions at an undervalue (s.238 IA 1986), preferences (s.239 IA 1986), knowing receipt, and equitable compensation for breach of directors’ duties under the Companies Act 2006 (Ch.2 Part 10, ss.170–179 and s.172(3)).

The principal factual issues were whether JRGL was insolvent or became insolvent as a result of the payments, whether KPL and AGL were "connected" with JRGL, whether the alleged arrangements or consideration relied upon by the defendants were evidenced, and whether Mr Freed was the controlling mind of the companies. The trial involved contested witness evidence; the judge accepted the joint administrator’s evidence (Mr Needham) but found the first defendant, Mr Freed, to lack candour and to give evidence inconsistent with contemporaneous documents. The judge also gave little weight to an unsigned, untested witness statement (Ms Thompson) and noted that a key figure, Moshe Freed, did not give evidence.

On the legal issues the court applied the principles governing directors’ duties (including the duty to consider creditors once insolvency is known or probable), the statutory tests for transactions at an undervalue and preferences (ss.238–241 IA 1986, including the presumptions applicable to connected persons under ss.239(6) and 240), and the liability in knowing receipt (identifying disposal in breach of fiduciary duty, beneficial receipt and knowledge at the recipient). The judge found as follows:

• JRGL was insolvent by October 2020 (or at least shortly thereafter) and had significant contingent liabilities including the likely Employment Tribunal award and unpaid VAT.
• KPL and AGL were "connected"/associates of JRGL and under the statutory presumptions their insolvency and the directors’ desire to prefer were not displaced.
• The KPL and AGL payments were not supported by credible evidence of consideration or of an agency arrangement; the judge rejected the defendants’ explanations and concluded the transfers were transactions at an undervalue and/or preferences.
• Mr Freed breached his duty to consider creditors (s.172 CA 2006 read with ss.170–179) and was not entitled to relief under s.1157 CA 2006; ratification by members was not available.
• KPL and AGL were liable to repay the sums (or alternatively liable for knowing receipt), jointly and severally with Mr Freed, for the full amounts claimed.
• The court declined to limit recovery to the administration shortfall. The judge reviewed authorities (including the earlier decision in Manolete v Hope and Re Totalbrand) and concluded that where a cause of action has been validly assigned the court should not, as a matter of general principle, impose a cap to protect recipients who would otherwise be liable, unless there are clear and exceptional reasons; no such reasons existed here.

The operative outcome was that Mr Freed was ordered to pay equitable compensation of £918,590; KPL was jointly and severally liable for £240,000; and AGL jointly and severally liable for £678,590. The judge invited the parties to agree form of order as to interest and costs.

This is a first-instance judgment in which the court entered judgment for the claimant. The court held that Mr Norman Freed breached his duties as director by causing substantial payments to related companies when JRGL was insolvent or imminently insolvent. KPL and AGL were liable under the Insolvency Act 1986 as recipients of transactions at an undervalue and/or preferences, and alternatively liable for knowing receipt. The court ordered full recovery of the sums claimed (equitable compensation from Mr Freed of £918,590; KPL jointly and severally liable for £240,000; AGL jointly and severally liable for £678,590), rejecting defences of ratification, relief under section 1157 CA 2006 and any limitation of recovery to the administration shortfall. The judge based these conclusions on documentary analysis, witness credibility findings and application of ss.238–241 IA 1986 and ss.170–179 and s.172 CA 2006.