Manolete Case Study: Court Confirms Misfeasance Claims Procedure (Hybrid Insolvency Applications)

This judgment (Manolete Partners plc v Hayward & Barrett Holdings Ltd & Ors [2021] EWHC 1481 (Ch)) provides important clarification on the limits of using Insolvency Act applications for so-called “hybrid claims”. The ruling confirms that while liquidators or assignees such as Manolete Partners may bring assigned transaction avoidance claims under sections 238 or 239 of the Insolvency Act 1986 by Insolvency Application, misfeasance claims under section 212 must be commenced by a Part 7 claim form.

The decision highlights the procedural traps in insolvency litigation funding and underlines the financial consequences of issuing proceedings incorrectly. This case sits at the intersection of directors’ duties claims, the assignment of insolvency actions under the Small Business, Enterprise and Employment Act 2015, and the practicalities of winding-up petitions involving multiple connected companies. Legal expertise is essential when facing claims issued by litigation funders such as Manolete Partners.

Case Background

The dispute arose following the collapse of Blackwater Plant Limited, a plant hire business that entered creditors’ voluntary liquidation on 17 August 2018. On the same day, its primary trading partner Hayward & Barrett Ltd was also placed into voluntary liquidation. Both companies were closely linked through their directors, Daniel and Steven Frost, who also acted as directors of the holding company Hayward & Barrett Holdings Ltd.

At the creditors’ meeting, Mr Clark was appointed liquidator of Blackwater, later joined by Mr Renshaw. The liquidators began investigating antecedent transactions and identified a series of payments and asset disposals that, they alleged, significantly disadvantaged creditors. Among the claims advanced were:

• Unsecured credit of £680,000 advanced by Blackwater to Hayward & Barrett, said to be irrecoverable.
• Transfers of valuable assets, including heavy plant equipment valued at £535,500 and vehicles worth £74,835, allegedly surrendered without proper consideration.
• Preferential payments to connected entities, including H&B and Holdings, in breach of section 239 Insolvency Act 1986.

To maximise recoveries for creditors, the joint liquidators entered into an assignment agreement with Manolete Partners plc on 3 September 2019 under section 246ZD Insolvency Act 1986. This permitted Manolete, as litigation funder, to pursue statutory transaction avoidance claims (such as preferences and undervalue transactions) and company law claims for breaches of duty, fraud, and misfeasance.

However, the legal mechanism chosen to commence proceedings became central to the dispute. Instead of issuing a Part 7 claim in the Business and Property Courts, Manolete sought to bring the entirety of its case, including both statutory avoidance claims and section 212 misfeasance allegations, by way of an Insolvency Application under rule 1.35 Insolvency Rules 2016.

The directors challenged this approach, arguing that Manolete lacked standing to bring section 212 claims through an Insolvency Application, as such applications are reserved to liquidators, official receivers, creditors, or contributories. The issue before Chief ICC Judge Briggs was whether Manolete’s hybrid claim was procedurally valid and, if not, whether the court could cure the defect. The director’s timely response rightly highlights the importance of engaging expert lawyers who are well versed in Insolvency Litigation.

View The PDF Judgment below:

Key Findings in Manolete v Hayward & Barrett Holdings Ltd

Distinction Between Assignable and Non-Assignable Claims

The judgment carefully analysed which claims may be assigned under section 246ZD Insolvency Act 1986. Judge Briggs confirmed that transaction avoidance provisions, such as sections 238 (transactions at undervalue) and 239 (preferences), can be assigned by liquidators to third parties like Manolete. These claims form part of the insolvent company’s property and fall squarely within the legislative framework introduced by the Small Business, Enterprise and Employment Act 2015.

However, he drew a sharp distinction when it came to section 212 misfeasance proceedings:

“As a matter of standing, section 212 does not permit an application to be made by the Applicant or Blackwater. The Applicant is not a creditor or contributory.” ([para 48]).

In other words, misfeasance claims tied to directors’ conduct of the company cannot simply be packaged with avoidance claims in an Insolvency Application. We routinely advice directors facing Insolvency proceedings as to their rights.

Rejection of “Established Practice” Arguments

Manolete argued that in practice, the Insolvency and Companies Court frequently permitted hybrid claims to proceed together for procedural convenience, avoiding duplication of costs and inconsistent case management. Counsel relied on older authorities such as Re Clasper Group Services Ltd and TSB Bank plc v Katz to argue that such applications had long been tolerated.

Judge Briggs rejected this:

“I reject the submission that the Insolvency and Companies Court has an established practice that overrides the Rules. If I am wrong as to that, such a practice cannot prevail in the teeth of the statutory framework.” ([para 55]).

This was a clear warning that even long-standing practice cannot circumvent the strict wording of the Insolvency Act and Civil Procedure Rules.

Court’s Discretion and Costs Sanction

While the misfeasance claims should technically have been issued under a Part 7 claim form, the court accepted that the defect was procedural rather than jurisdictional. Judge Briggs therefore exercised discretion under CPR 3.10 to regularise the proceedings, but only on condition that Manolete paid the significantly higher Part 7 issue fee:

“In the circumstances of this case an appropriate condition is to order payment of the prevailing court fee for issuing a Part 7 Claim within 7 days of the handing down of this judgment.” ([para 59]).

This pragmatic solution avoided striking out the claim entirely but underscored the financial risk of adopting the wrong procedure. However, with expert legal submissions, a strike-out may have been possible.

Implications of Manolete v Hayward & Barrett Holdings Ltd

This ruling has several key implications for insolvency practitioners, funders, and directors alike.

First, it confirms that procedural compliance is as important as substantive grounds. Even strong claims for breach of duty can be delayed, fragmented, or made more costly if issued incorrectly. For directors facing claims, this offers a line of defence: procedural challenges may create leverage in negotiations if tackled correctly by legal experts.

Second, the case demonstrates the courts’ commitment to maintaining statutory boundaries. While judges have discretion under CPR 3.10 to correct procedural irregularities, they will not condone practices inconsistent with the Insolvency Act or Insolvency Rules. Directors and their advisers should take confidence that “shortcuts” will not automatically succeed, even when advanced by well-resourced funders.

Third, the decision raises broader questions about access to justice in insolvency litigation. By requiring Part 7 issue fees for certain claims, the courts increase the upfront cost of pursuing directors, potentially deterring weaker or marginal cases. This acts as a filter, ensuring only claims with realistic prospects and sufficient funding proceed.

Finally, it reinforces the importance of specialist legal advice. As shown in our legal guide to defending claims from Manolete Partners, directors who seek early advice from experienced insolvency solicitors can exploit procedural weaknesses in claims to reduce liability or negotiate more favourable settlements.

Defending Manolete Director Claims

The case illustrates that procedural scrutiny and timely legal advice can significantly shape the trajectory of Manolete-funded claims. Defendants should not assume that once a claim is issued, it is procedurally watertight. By engaging expert solicitors in directors’ duties claims, directors may expose fundamental weaknesses in claimants’ standing, assignment, or procedural route.

Practical defence strategies include:

• Forensic accounting analysis, testing whether alleged “irrecoverable debts” were commercially rational rather than negligent or unlawful.
• Challenging standing, particularly for section 212 claims, which cannot be assigned wholesale to litigation funders.
• Highlighting procedural errors, as occurred here, where misfeasance claims should have been issued by Part 7.
• Leveraging settlement dynamics, given that additional costs (such as the Part 7 fee) may weaken Manolete’s negotiating position.

This measured approach often proves decisive, particularly where defendants face simultaneous allegations of undervalue transactions, preferences, and misfeasance. By targeting the structure of the claim itself, directors can level the playing field against well-funded adversaries. If you are facing a claim by a litigation funder such as Manolete, contact now for expert legal advice!