The High Court ruled in the case of Manolete Partners plc v Freed & Ors[2024] EWHC 2242 (Ch) that Norman Freed, former director of Just Recruit Group Ltd (JRGL), must repay £918,590 after making preferential payments to connected companies while JRGL faced insolvency. Judge Mullen condemned the payments as “a cynical scheme to abstract funds”, rejecting defences that sought to limit liability. The judgment reinforced directors’ fiduciary obligations to creditors during financial distress and clarifies limits on liability defences in assigned claims.
Case Background
JRGL, a recruitment agency, entered administration in January 2021 with a £1.2m creditor deficit. Between October and December 2020, Freed authorised payments totalling £918,590 to Key People Ltd (KPL) and Achieva Group Ltd (AGL), both linked to him.
Administrators assigned claims to litigation funder Manolete Partners, which pursued breaches of duty under the Companies Act 2006 and Insolvency Act 1986.
We are the leading UK firm defending directors against Manolete Partners’ claims due to our expertise in insolvency litigation and strategic defence tactics. Our dual-qualified and experienced solicitors & barristers, based near London’s Royal Courts of Justice, specialise in countering Manolete’s aggressive pursuit of transactions-at-undervalue claims e.g. by challenging evidence validity, leveraging limitation periods, and demonstrating good faith per the Insolvency Act 1986. We have a track record of protecting directors’ assets, including family homes, while navigating complex financial and regulatory risks. Our insolvency law focus and experience with litigation funders ensures tailored, robust defence in high-stakes claims. Get in touch about your Director’s Duties case.
Key Findings in Manolete v Freed
Breach of Director Duties:
ICC Judge Mullen found Freed prioritised connected creditors over JRGL’s obligations. The court rejected Freed’s claim that payments reflected legitimate intercompany arrangements, noting a lack of invoices or evidence for services rendered.
118. The payments had the effect of transferring substantial monies to KPL and AGL with no resulting benefit to the company or its creditors. Not only did this confer a benefit on KPL and AGL but also on Mr Freed by virtue of his interest in those companies. I am satisfied that there was no proper purpose for the transfers and they were made in breach of his duty to consider and act in the interests of creditors preserved by section 172(3) CA 2006. The company was insolvent by October 2020, or at the very least it was probable that the company was about to go into an insolvency procedure shortly, and those interests were paramount. The irresistible conclusion is that Mr Freed deliberately sought to transfer assets from a company that he knew to be an insolvent company or, at the very least, a company on the verge of insolvency, to others with which he was associated knowing that the result would be that other creditors would not be paid. Were that not the case, and he gave no consideration to those interests in making the payments at a time when the company was insolvent or on the verge of insolvency, I am satisfied that he knew that there were creditors, at least in the form of Mr Neto who would be prejudiced by the payments. The decision to make the payments cannot be justified, looked at objectively, given the insolvency of JRGL. I am satisfied that Mr Needham did not give him any advice that he would make the payments in these circumstances.
119. The ratification defence cannot succeed. There is no evidence that the shareholders of JRGL ever turned their mind to the breach. Moreover, the Company was insolvent at the time of the payments, and if not, undoubtedly became so as a result of the payments. It is not open to shareholders to ratify breaches in such circumstances.
120. Nor is Mr Freed entitled to relief under section 1157 CA 2006. He has not satisfied me that he has behaved honestly or reasonably. On the contrary, he has shown, to put it at its lowest, a lack of candour both in his dealings with the joint administrators and his evidence in this court. The only conclusion that can be formed from the evidence that I have seen is that the payments were, at best, made without proper consideration of the interests of creditors and, at worst, a cynical scheme to abstract funds from JRGL and leave the debts of unconnected creditors in the company.
Transactions at Undervalue and Preferences:
The £240,000 paid to KPL and £678,590 to AGL were deemed transactions at undervalue (s.238 IA 1986) and preferences (s.239 IA 1986). The judge emphasised JRGL’s insolvency during the payments and the presumption of unfair preference for connected parties.
Rejection of “Circularity” Defence:
The court in Manolete Partners plc v Freed rejected the “circularity” defence-which argued liability should be capped at the administration’s shortfall to avoid funds cycling back to defendants-by distinguishing it from Re Care Community. Judge Mullen held that no “money-go-round” risk existed because the defendants (Freed and his associated companies) were not creditors of the insolvent firm, Just Recruit Group Ltd (JRGL). Only one entity, KPL, had a potential shareholder claim to surplus assets, but three unrelated shareholders diluted any circular benefit.
Crucially, the judge emphasised that restoring misappropriated assets takes precedence over procedural limitations, stating:
“The payments ought not to have been made…the starting point is that the Defendants should meet the loss caused in full…the aim is to restore the property wrongly paid away”.
This aligns with policy objectives under the Insolvency Act 1986 to deter misconduct by ensuring full recovery, even when claims are monetised by third parties like litigation funders. The ruling reinforces that circularity defences require near-total identity between defendants and creditors, absent here, to avoid undermining creditor protections.
Implications of Manolete v Freed
- Director Accountability: The ruling underscores that creditors’ interests become paramount when insolvency is imminent (BTI v Sequana[2022] UKSC 25). Ratification by shareholders is invalid in such cases.
- Litigation Funding: Assignees like Manolete can pursue full recovery, not limited to administration deficits, ensuring wrongdoers bear full liability.
- D&O Risk: Directors face heightened exposure if asset transfers favour connected parties pre-insolvency.
Defending Manolete Director Claims
This ruling empowers litigation funders like Manolete to pursue directors with aggressively and with vigor. Courts demand real-time compliance with creditor duties, treating even temporary financial distress as a trigger for liability. For directors, this creates a perilous position: funders are financially well resourced and are legally sophisticated for example exploiting extended limitation periods, while personal assets such as homes, savings, futures-hang in the balance.
Througg decades of succesful litigation experience we have developed litigation counterstrategies, dissecting claims for procedural flaws (e.g., missed deadlines, overstated valuations) and reframing directors’ decisions within commercial reality. Our team’s mastery of Insolvency Law defenses and direct experience negotiating with funders ensures swift de-escalation and optimal outcomes.
Directors facing Manolete’s machinery should seek immediate, tactical advice from specialists not general solicitors and counsel in order to dismantle claims at their weakest link. LexLaw’s battle-tested playbook turns Manolete’s aggressive monetisation into resolvable disputes.
FAQ on Directors Duties Cases
Why is this case significant for insolvency law?
It clarifies that directors cannot shield themselves via “circularity” arguments when claims are assigned to third parties, such as Manolete, ensuring accountability even where connected creditors dominate.
What constitutes a transaction at undervalue?
Under s.238 IA 1986, transfers for no consideration or significantly less value than received, made two years pre-insolvency if the company was already or became insolvent.
How does this affect litigation funders?
Assignees can recover the full loss caused by breaches, incentivising enforcement of directors’ duties and supporting insolvency processes.
What defences are available to directors in similar cases?
Proving payments served creditor interests or disputing insolvency timing. However, subjective beliefs must align with objective financial realities. Always obtain legal advice from expert Director Defence Solicitors & Barristers.
Can shareholders ratify breaches during insolvency?
- No. Sequana confirms ratification is invalid if the company is insolvent or nearing insolvency.
If my company is dissolved, can Manolete still pursue me personally for historic transactions?
Yes, dissolution does not shield directors from claims arising from pre-dissolution conduct. The Insolvency Act 1986 allows funders to revive claims via restoration of the company to the register (s.1030), even years later. LexLaw counters this by challenging restoration applications on proportionality grounds and exploiting gaps in Manolete’s documentary trail.
Does Manolete’s litigation funding model give them unfair leverage in negotiations?
Funders like Manolete exploit asymmetric risk tolerance: they deploy pooled capital to pressure directors into settlements, knowing most lack resources for protracted trials. We help neutralise this, for example by:
- Leveraging CPR 31.16 to seek pre-action disclosure, weakening Manolete’s “ambush” tactics.
- Filing strike-out applications for claims exceeding the 6-year limitation period (IA 1986, s.240).
- Demanding transparency on funding terms to expose conflicts of interest.
Can I argue that repaying a claim would indirectly benefit me as a shareholder, reducing my liability?
Courts may reject “circularity” defences unless 100% identity exists between defendants and creditors. For example, if you own 60% of a creditor entity, 40% of the claim remains enforceable. LexLaw can help mitigate this via:
- Forensic accounting to isolate “non-recoverable” portions of claims.
- Applying Re HLC Environmental Projects Ltd to cap liabilities where third-party creditors are involved.
- Negotiating phased settlements that account for diluted ownership structures.
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