Manolete Partners PLC v Brown & Ors [2025] EWHC 522 (Ch) reinforces directors’ fiduciary obligations to prioritise creditor interests when a company is insolvent or facing insolvency. The ruling, pursued by litigation funder Manolete Partners, highlights the considerable legal and financial risks for directors who authorise payments for personal benefit, as frequently seen in misfeasance claims. The judgment provides important clarification on how the court assesses breach of duty in the context of an insolvent company, particularly where directors continue to extract value from a business after it has become apparent that creditors’ interests are at risk under section 172 of the Companies Act 2006.

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Case Background

New Line Polymers Limited was incorporated on 23 January 2012 with its registered office at Alpha House, 176a High Street, Barnet. The company operated in the waste management sector, specifically focusing on the “treatment and disposal of non-hazardous waste” and aimed to exploit emerging opportunities in recycling previously unrecyclable plastics. This potentially lucrative business attracted significant investment, with investors contributing over £3.1 million to the venture.

The company’s directors included Thomas Brown and Mrs. Marley (siblings), who received substantial guidance from their father, Mr. Brown. Mr. Brown senior had background experience in engineering and recycling but lacked financial expertise. Despite the considerable investment received, the company’s financial management quickly became problematic. By December 2015, the company had failed to file its accounts on time, and by May 2017, its confirmation statement was also overdue.

The financial mismanagement eventually led to the company’s collapse, with New Line Polymers entering creditors’ voluntary liquidation on 5 July 2017. At this point, the entirety of the £3.1 million investment had been lost. Following standard insolvency procedure, the liquidator investigated the company’s affairs and identified potential claims against the directors for breach of their fiduciary duties. These claims were subsequently assigned to Manolete Partners PLC, a specialist insolvency litigation financing company that pursues claims to recover funds for the benefit of creditors of insolvent estates.

Notably, one of the company’s directors, Paul Bennett, was not included in the proceedings as a bankruptcy order had been made against him on 6 December 2022, prior to the initiation of the case. This left the Browns as the primary focus of Manolete’s claim, with allegations centring on misfeasance and breach of directors duty during a period when the company was allegedly insolvent throughout its operation.

Key Findings: Manolete Partners v Brown

Breach of Director Duties

In his judgment, the High Court judge found substantial evidence that the directors had breached their fiduciary duties to the company. The court was particularly critical of the fact that the directors had continued to extract value from the company despite clear signs of financial distress. The judgment emphasised that directors have an enhanced duty to consider creditors’ interests when a company is insolvent or at risk of insolvency, in line with established case law and the Companies Act 2006.

The court found that the company was insolvent throughout much of its operation, a critical finding that triggered the directors’ duty to prioritise creditors’ interests. Despite this insolvency, the directors continued to authorise payments that benefited themselves or related parties rather than addressing the company’s financial difficulties.

Improper Financial Transactions

The court’s analysis of the financial transactions revealed a pattern of inappropriate payments. Thomas Brown was found to have received £126,425 from the company, while Mrs. Marley’s financial involvement mirrored that of her brother. The court was particularly concerned with payments totalling £253,650 made directly to Mr. Brown and an additional £268,351 paid into unknown accounts.

These transactions, occurring during a period of insolvency, were deemed to be in breach of the directors’ duties to act in the best interests of the company and its creditors. The court rejected arguments that these payments were for legitimate business purposes, instead finding that they constituted improper extraction of value from an insolvent company.

Rejection of Good Faith Defence

While the full details of the directors’ defences are not available in the public record, it appears the court rejected any claims that the directors had acted in good faith or with a reasonable belief that their actions were proper. The judgment highlighted the directors’ lack of financial expertise, particularly noting Mr. Brown senior’s background in engineering and recycling but absence of financial acumen.

This finding reinforces the principle that ignorance of financial matters does not excuse directors from their fundamental fiduciary duties. Directors must seek appropriate advice when making financial decisions, particularly when a company faces potential insolvency.

Implications of Manolete Partners v Brown

This judgment has several significant implications. First, it reinforces the established principle that directors must prioritise creditors’ interests when a company is insolvent or at risk of insolvency. This duty supersedes any obligation to shareholders and requires directors to take active steps to minimise potential losses to creditors.

The case also highlights the risks for family-run businesses where directors may lack formal financial training or fail to maintain proper corporate governance. The court’s willingness to hold directors liable despite their claimed lack of financial expertise serves as a warning that all directors, regardless of background, must meet the same legal standards of conduct. This aligns with recent trends in directors’ disqualification proceedings, where courts have been increasingly strict in assessing directors’ compliance with their statutory duties.

Furthermore, the judgment demonstrates the effectiveness of the Manolete Partners business model in pursuing claims against directors of insolvent companies.

For directors of struggling companies, this case serves as a timely reminder of the need for caution when authorising payments during periods of financial difficulty. Any transaction that could be seen as preferring certain creditors (particularly related parties) or extracting value from the company at creditors’ expense could potentially lead to personal liability.

Defending Manolete Director Claims

Directors facing claims from Manolete Partners should consider several strategic approaches to defend themselves. Early engagement with specialist insolvency solicitors is crucial, as these cases often involve complex legal and financial issues that require expert guidance. Defending directors should immediately secure all relevant financial records and documentation to establish the context of any challenged transactions.

A comprehensive financial analysis is essential to challenge allegations of insolvency at the time of the disputed transactions. Directors should work with forensic accountants to review the company’s financial position, applying both cash flow and balance sheet tests of insolvency. Even if insolvency is established, directors may still defend themselves by demonstrating that the challenged transactions were in the best interests of creditors at the time they were made.

Directors should also consider whether they can rely on the statutory defence under section 1157 of the Companies Act 2006, which allows the court to grant relief if the director acted honestly and reasonably. However, the Brown case suggests that claims of financial naivety or lack of expertise may not be sufficient, particularly where directors have failed to seek appropriate professional advice.

For connected party transactions, directors should be prepared to provide evidence of commercial justification and fair value. Any payments to directors or related parties should be documented with clear business rationales and, ideally, independent valuations or assessments. Directors should also explore whether professional negligence claims against advisors might be appropriate if they received inadequate guidance during the relevant period.

It’s worth noting that Manolete’s funding model means they typically undertake a thorough assessment of claims before proceeding, focusing on cases with strong merits. As such, early settlement discussions may be advisable in some circumstances, potentially through alternative dispute resolution processes such as mediation.

Conclusion

The Manolete Partners PLC v Brown case provides important guidance on directors’ duties during financial distress and the serious consequences of misappropriating company funds while insolvent. The High Court’s decision to hold the Browns liable for £522,000 reinforces the strict standards to which directors are held when managing companies in financial difficulty.

This case demonstrates that courts will not hesitate to impose personal liability on directors who fail to prioritise creditors’ interests when their company is insolvent, even where those directors claim to lack financial expertise. It also highlights the effectiveness of the Manolete Partners business model in pursuing claims against directors of insolvent companies for the benefit of creditors.

For directors of struggling companies, this judgment serves as a stark reminder of the need for caution, proper record-keeping, and appropriate professional advice when navigating periods of financial distress. The shift from shareholder-focused duties to creditor-focused duties upon insolvency is a critical transition that directors must recognise and respond to appropriately.

Legal practitioners advising directors should emphasise the importance of early intervention when companies face financial difficulties, the need for clear documentation of decision-making processes, and the value of seeking independent financial and legal advice before authorising significant transactions. With proper guidance, directors can navigate these challenging situations while minimising their personal risk exposure.