This judgment (Manolete Partners PLC v Freed & Ors[2024] EWHC 2242 (Ch)) reinforces directors’ duties during insolvency and highlights the risks for directors who transfer company assets to associated entities, as often seen in transactions-at-undervalue disputes. The ruling, pursued by litigation funder Manolete Partners, demonstrates how the courts view asset transfers before administration and the personal liability directors may face under section 172 of the Companies Act 2006.
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.
Case Background
In 2020, Just Recruit Group Limited (JRGL), a recruitment services company, experienced significant financial difficulties. Norman Freed, who became a director in November 2018, claimed these troubles stemmed from both former directors breaching employment covenants and the impact of COVID-19 on the business. According to management accounts submitted to the administrator in December 2020, the company was trading at a loss and was balance sheet insolvent.
Between October and December 2020, Mr. Freed caused JRGL to make substantial payments to two connected companies: Key People Limited (KPL) and Achieva Group Limited (AGL). These payments totalled £918,590, comprising £240,000 to KPL (made in two tranches of £120,000 on 9th October and 14th December 2020) and £678,590.18 to AGL (made between 17th and 24th December 2020)1. Notably, the payments to AGL were made immediately before and after a meeting with insolvency practitioners on 18th December 2020, when the company was confirmed to be insolvent.
Mr. Freed maintained significant control over all three companies. He was the sole director of JRGL at the time of the payments, had beneficial ownership of 40% of KPL through a company called CMC Investments, and was the beneficial owner of AGL. Following these substantial payments, JRGL entered administration on 29th January 2021, with its business and assets being sold to AGL through a pre-pack administration for just £50,0001. Subsequently, the administrators assigned their claims against Mr. Freed, KPL and AGL to Manolete Partners plc, which then pursued litigation to recover the payments made when the company was insolvent.
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Key Findings in Manolete v Freed
Breach of Director Duties
ICC Judge Mullen found that Mr. Freed had breached his fiduciary duties to consider and act in the interests of creditors preserved by section 172(3) of the Companies Act 2006. In his judgment, he stated:
“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 judge concluded that Mr. Freed deliberately sought to transfer assets from an insolvent company to entities with which he was associated, knowing that other creditors would not be paid. This finding was damning for the director, as it established clear personal liability for the full amount of the improper transfers.
Rejection of Defendants’ Evidence
Judge Mullen systematically dismantled the defendants’ case, describing their evidence as “unreliable,” “inherently improbable,” “implausible” and “contradictory”. The judge was particularly critical of Mr. Freed’s testimony, stating:
“This, and other instances where there are flat-out contradictions between what he says now and what he has said in the past lead me to conclude that I cannot rely on his evidence. Where his evidence is not corroborated or otherwise inherently probable, I reject it.”
The defendants had claimed that the payments to KPL were for management services and that the payments to AGL were made at the direction of KPL to pay creditors. However, the court found no evidence to support these claims-no service contracts, no invoices, and no evidence of an agency relationship between the companies. The judge concluded that the explanations were fabricated to justify the improper movement of funds.
Transactions at Undervalue & Preference Claims
The court determined that the payments constituted transactions at undervalue under section 238 of the Insolvency Act 1986 and/or preferences under section 239. Judge Mullen found that:
“I am, again, satisfied that there was no consideration for these payments. They were made within the period provided for by section 238 IA 1986 to a connected company, JRGL’s inability to pay its debts is presumed and the presumption has not been displaced.”
The court also noted that even if the transactions were not at an undervalue, they would amount to preferences, having been made to connected persons during the statutory period when JRGL was clearly insolvent, with a presumed desire to prefer these companies over other creditors.
Rejection of the “Shortfall” Limitation Argument
Significantly, the court rejected the defendants’ argument that their liability should be limited to the shortfall in the administration (approximately £350,000). The defendants had argued that any greater recovery would be “circular” since KPL was a creditor of JRGL. Judge Mullen followed and affirmed the decision in Manolete Partners plc v Hope [2022] EWHC 1801 (Ch), holding that recovery should not be limited to the administration shortfall.
The judge noted that limiting recovery would “discourage the pursuit of claims that the Small Business, Enterprise and Employment Act 2015 was intended to facilitate” and that “there is a public interest in wrongdoers being pursued and the standards of corporate governance being upheld”. This reinforces the deterrent effect of insolvency litigation and supports the commercial model of litigation funders like Manolete.
Implications of Manolete Partners v Freed
This judgment carries significant implications for directors of companies facing financial difficulties. First, it confirms that courts will rigorously scrutinise transactions made by directors during periods of insolvency, particularly those involving connected parties. Directors cannot simply move money between associated entities when a company is struggling and expect these transactions to withstand legal challenge.
The case also reinforces the principle that directors’ duties shift decisively toward creditors when a company is insolvent or approaching insolvency. As clarified in BTI v Sequana [2022] UKSC 25, this duty is engaged when directors know or ought to know that insolvency is imminent or that it is probable the company will enter an insolvency process. Directors who fail to prioritise creditors’ interests during this critical period face personal liability.
For insolvency practitioners and litigation funders, the judgment provides confirmation that recoveries in assigned claims are not limited to the shortfall in the administration. This supports the commercial viability of the litigation funding model used by firms like Manolete Partners, which plays an important role in the insolvency regime by ensuring that claims are pursued even when the insolvent estate lacks resources.
The case also highlights the court’s unwillingness to accept technical defences where there is clear evidence of improper conduct. Judge Mullen was particularly dismissive of attempts to shift blame to others or to claim that the transactions were part of legitimate business arrangements without supporting evidence. This demonstrates the courts’ focus on substance over form in insolvency litigation.
Defending Manolete Director Claims
If you are facing similar claims from Manolete Partners or another insolvency litigator, several defensive strategies should be considered. A comprehensive review of all transactions made during the period of financial distress is essential, with particular attention to payments made to connected parties. Expert legal advice should be sought immediately to assess potential exposure and develop a robust defence strategy.
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Thorough documentation of the commercial rationale behind all decisions is crucial when navigating potential insolvency. Directors should maintain detailed records of board discussions, including considerations of creditors’ interests when financial difficulties arise. Where services are provided between group companies, formal agreements should be in place with market-rate consideration and proper invoicing processes. The Freed case illustrates how the absence of documentary evidence can be fatal to a defence.
Forensic accounting expertise can be invaluable in defending transactions at undervalue claims. By demonstrating that adequate consideration was provided or that the transaction was entered into in good faith for the benefit of the company, directors may establish a statutory defence under section 238(5) of the Insolvency Act 19866. Contemporaneous valuation evidence or independent business advice sought at the time can significantly strengthen such defences.
Directors should also consider seeking indemnities or warranties from other stakeholders when implementing corporate restructuring during financial difficulties. Understanding the nuances of connected party transactions and the extended vulnerability periods they create under sections 238 and 239 of the Insolvency Act is essential for developing effective risk management strategies. These precautions can provide crucial protection if transactions are later challenged.
Comparative Analysis: Types of Manolete Claims and Potential Defences
Understanding the different types of claims Manolete typically pursues and their associated defences can help directors assess their risk profile and prepare appropriate defensive strategies:
| Claim Type | Legal Basis | Defences | Notes |
|---|---|---|---|
| Transactions at Undervalue | Section 238, Insolvency Act 1986 | – Good faith + benefit to company (s.238(5)) – Market value consideration – Legitimate commercial purpose | – 2-year vulnerability period for connected parties – Presumption of insolvency for connected parties – Burden on director to prove defence |
| Preferences | Section 239, Insolvency Act 1986 | – No desire to prefer – Payment in ordinary course of business – Commercial pressure from creditor | – 2-year vulnerability period for connected parties – Presumption of desire to prefer for connected parties – Subjective test for “desire” |
| Breach of Directors’ Duties | Companies Act 2006, ss.170-177 | – Business judgment rule – Relief under s.1157 CA 2006 – Ratification by shareholders (if solvent) | – Duty shifts to creditors near insolvency – Ratification not available in insolvency – Honest and reasonable conduct required |
| Wrongful Trading | Section 214, Insolvency Act 1986 | – Every step taken to minimise loss – Reasonable prospect of avoiding insolvency – Professional advice obtained | – Knowledge-based test – Personal liability for contribution – Limitation to loss caused |
| Misfeasance | Section 212, Insolvency Act 1986 | – Proper purpose – Acting in good faith – Reasonable care, skill and diligence | – Broad remedial provision – Covers breach of fiduciary duty – Court has discretion on remedy |
This analytical framework demonstrates the complexity of defending Manolete claims and highlights the importance of obtaining specialist legal representation from solicitors experienced in insolvency litigation and directors’ duties.
FAQs on Directors Duties Cases
What makes the Manolete Partners v Freed case significant for company directors?
This case highlights the severe consequences directors face when transferring company assets during insolvency. The court ordered repayment of the full £918,590, rejecting arguments that recovery should be limited to the administration shortfall. The case demonstrates that directors cannot shield themselves by moving assets between connected companies when financial difficulties arise. Courts will scrutinise such transactions and may impose personal liability for the entire amount transferred, regardless of the company’s deficiency10. Directors must understand their statutory duties shift towards creditors when insolvency looms, and technical defences are unlikely to succeed where there is evidence of improper conduct.
Can a director be personally liable for pre-insolvency payments to connected companies?
Yes, directors can be personally liable for payments made to connected companies before insolvency. As seen in the Freed case, where a director causes payments to be made to entities in which they have an interest when the company is insolvent, they risk personal liability for breach of their fiduciary duties under section 172(3) of the Companies Act 20061. This liability extends to the full amount transferred, potentially creating significant personal exposure. Our litigation team regularly advises directors on implementing proper governance procedures for intercompany transactions, including obtaining independent valuations and documenting the commercial rationale for all decisions to help mitigate this risk.
How does Manolete’s funding model affect settlement negotiations?
Manolete’s funding model significantly influences settlement dynamics. As confirmed in this case, Manolete can pursue recovery of the full amount transferred, not just the deficiency in the administration10. This increases the potential damages and may strengthen their negotiating position. Unlike traditional litigation funders who simply finance cases, Manolete takes assignment of claims, becoming the actual claimant. This means they can directly control litigation strategy and settlement decisions. Our experience in defending Manolete claims shows their commercial approach typically focuses on early settlement where possible, but they are prepared to litigate fully when necessary, often relying on the evidential advantages created by insolvency practitioners’ investigations.
What defences are available against transactions at undervalue claims?
Several defences exist against transactions at undervalue claims. Section 238(5) of the Insolvency Act 1986 provides a statutory defence if the transaction was entered into in good faith for the purpose of carrying on the business, and there were reasonable grounds for believing it would benefit the company1. Directors can also challenge the assertion that the transaction was at an undervalue by demonstrating that adequate consideration was provided. For transactions with connected parties, the burden of proof is higher, as insolvency is presumed1. Our insolvency specialists regularly assist directors in gathering contemporaneous evidence of commercial rationale, market valuations, and professional advice sought at the time to build robust defences to such claims.
What steps should directors take when a company faces financial difficulties?
When financial difficulties arise, directors should immediately take several protective steps. First, hold regular board meetings specifically addressing the company’s financial position, documenting all discussions about creditors’ interests. Second, seek professional insolvency advice early-courts look favourably on directors who obtain and follow appropriate guidance. Third, avoid preferential payments to connected parties or transactions at undervalue, as these are particularly vulnerable to challenge5. Fourth, consider whether continued trading is appropriate, documenting the rationale for decisions. Finally, maintain comprehensive records of all financial decisions and transactions. Our corporate advisors provide directors with strategic guidance during financial distress, helping to navigate these complex duties while minimising personal exposure.
How long after insolvency can Manolete bring claims against directors?
Manolete can bring claims against directors for several years after insolvency. For breach of fiduciary duty claims, the limitation period is typically six years from the date of the breach. For transactions at undervalue or preferences involving connected parties, claims can be brought for transactions occurring up to two years before the onset of insolvency1. Manolete, as assignee, steps into the shoes of the insolvency practitioner and inherits the same limitation periods. These extended timeframes mean directors may face claims long after the company’s insolvency. Our litigation defence team has extensive experience in challenging claims on limitation grounds and advising former directors when historic transactions are investigated.
Can shareholders ratify breaches of directors’ duties in insolvency situations?
No, shareholders cannot ratify breaches of directors’ duties once a company is insolvent or likely to become insolvent. As confirmed in BTI v Sequana[2022] UKSC 25 and referenced in the Freed judgment, the ratification principle does not apply to decisions made when a company is already insolvent or where implementation would render the company insolvent1. This is because when insolvency looms, directors’ duties shift toward prioritising creditors’ interests, and shareholders cannot authorise actions that prejudice creditors. In the Freed case, the court explicitly rejected the ratification defence, stating there was no evidence shareholders ever considered the breach and, more fundamentally, that ratification was not available given the company’s insolvency1.
How does the court determine if a company was insolvent at the time of challenged transactions?
Courts apply both cash flow and balance sheet tests to determine insolvency. Cash flow insolvency occurs when a company cannot pay debts as they fall due, while balance sheet insolvency exists when liabilities exceed assets. In the Freed case, the court considered several factors: management accounts showing balance sheet insolvency, unpaid tax liabilities, trading losses, the timing of insolvency advice being sought, and confirmation from insolvency practitioners that the company was insolvent. For connected party transactions, the burden shifts to the director to prove the company was solvent1. Our insolvency specialists regularly advise on insolvency indicators and help directors document the company’s true financial position to defend against subsequent challenges.
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