High Court grants claim in significant and instructive insolvency proceedings: Manolete Partners Plc v Karim & Ors

Manolete Partners Plc v Karim & Ors [2024] EWHC 2053 (Ch)

Hugh Miall recently acted for the successful Claimant, a specialist insolvency litigation financing company, in a significant and factually striking claim for breaches of directors’ duties and associated wrongs arising out of a substantial insolvent liquidation. The judgment explores an array of legal issues, principles and authorities relevant to insolvency litigation more widely.

Following a trial in April 2024 Richard Spearman KC, sitting as a Deputy High Court Judge, handed down judgment in Manolete Partners Plc v Karim & Ors [2024] EWHC 2053 (Ch) in August 2024. The Judge found in Manolete’s favour on all the claims it pursued to the end of trial, giving judgment for sums in excess of £5m, together with proprietary and other relief sought.

The Facts

Evershine Travel Limited (the “Company”) was an online car rental operator and consolidator. It entered insolvent administration on 19 January 2017 with a very significant estimated shortfall creditors of £17.58m. It moved into CVL a year later.

The First to Third Defendant brothers were the directors and beneficial owners of the Company. The Fourth Defendant was married to the First Defendant. The Fifth Defendant was married to the Second Defendant, but was made bankrupt before the trial and the claims against her were stayed. A claim against the Company’s previous solicitor was settled some time prior to trial.

During the last 5 or so years of its trading life, the Company entered into a very large number of transactions which, Manolete contended, appeared to have nothing to do with its business or commercial activities. Rather, its case was that the directors caused the Company to pay away very substantial sums primarily for the personal benefit of the directors and persons closely connected to them. The facts of some of those transactions were astonishing. For example, US$1.45m was paid to companies or individuals connected with speculative mining projects in Africa; over $1m was paid into trading accounts through a US financial brokerage; over £922,000 was spend on company credit cards in a 6-year period; and almost £500,000 was paid to the directors as alleged bonuses or additional remuneration outside of payroll. This was an archetypal case where the Company was treated as if it was a bank, and its assets the property of its directors.

A knowing receipt claim was brought against the Fourth Defendant in relation to monies received by her from the Company, which was supplemented at trial with a proprietary claim to part of a property which it transpired had been acquired with £250,000 derived from Company funds.

The Arguments

Manolete contended that each of the various transactions was contrary to the Company’s best interests and entered into in breach of the directors’ duties. In particular, Manolete relied on breaches of ss.171, 172 and 174 of the Companies Act 2006. Manolete also contended that dividends paid to the directors were unlawfully made in breach of Part 23 of the Companies Act. As part of its claims Manolete argued that, contrary to what appeared from its statutory accounts (which suggested the Company was profitable and balance sheet solvent), the Company was actually insolvent or of doubtful solvency for a long time prior to administration, and that the accounts improperly included large debt assets which were, in reality, not debts due to the Company or not likely to be recovered. Manolete also contended that the Fourth Defendant had unconscionably received monies allegedly for work done (where there was insufficient evidence to support the value of payments made) and that a proprietary claim existed to a flat purchased by the First and Fourth Defendants using £250,000 of the Company’s money.

The Defendants denied all the claims, contending that the transactions were lawful, entered into as part of the Company’s commercial activities and in compliance with the directors’ duties. They also denied the accounts were materially inaccurate or that the Company was insolvent for the period contended for by Manolete. The Defendants also raised limitation defences, contending that transactions carried out more than 6 years prior to the date of issue (June 2020) were barred.

The Result  

The Judge found for Manolete on all of the claims advanced, giving judgment on financial claims worth over £5m, together with proprietary relief in respect of property owned by the First and Fourth Defendants.

As well as being a striking case on its facts, the judgment explores an array of legal issues, principles and authorities relevant to insolvency litigation more widely. Particular points of interest include:

• How s.171(1)(b) CA 2006 might usefully accompany a claim under s.172 CA, particularly in cases where misappropriation or misapplication of assets is alleged. The judgment explores the differences in the relevant tests to apply, and qualifications to the subjective nature of the test under s.172 CA.
• The legal principles relevant to claims for unlawful distributions, including the mandatory nature of compliance with the statutory requirements, and the different ways in which shareholders and directors might be found liable in relation to improper distributions.
• The relevance of a director’s fiduciary obligation to account for their dealings with company property. In particular, that the burden falls on the director to explain transactions in issue, even where there are hundreds of such transactions (and the director cannot rely on the inadequacy of his own record keeping to justify being unable to offer a proper explanation for what has happened to company assets).
• Circumstances in which the Court is prepared to look beyond (and behind) a company’s statutory accounts to assess questions of both balance sheet and commercial solvency, and the forensic and evidential process necessary to pursue such a course.
• How limitation defences might be defeated in cases of this nature, including how s.32 LA 1980 might operate to defeat limitation defences of not only primary wrongdoers such as directors, but also third-party recipients (including innocent volunteers) who have received assets through the actions of the principal wrongdoer.

A copy of the judgment can be found here.

Hugh Miall was instructed by Nichola Leach and Robin Henry at Collyer Bristow LLP. Hugh enjoys a thriving commercial chancery practice, encompassing commercial disputes, civil fraud, insolvency and company law, and trusts litigation. His domestic practice is regularly supplemented with work connected to and in other jurisdictions, in particular the Channel Islands, Gibraltar, the Cayman Islands and the BVI, where Hugh is called.

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