October 6th 2020

Welcome to our fourth newsletter of 2020

Welcome to our fourth newsletter of 2020

This newsletter is a regular update to all our IP, solicitor and barrister contacts. It contains changes to our growing team, updates on the Manolete business model which we hope will be helpful to you, as well as key judgments and articles of interest.

In this newsletter you will find:

  • Reported Cases by Mena Halton, Head of Legal
  • Latest Recruits: Graham Briggs and James Bull
  • TRI Conference 9 December – Manolete Headline Sponsor
  • Time and Time Again by Stephen Baister, Non-Executive Director

Reported Cases
By Mena Halton, Head of Legal

“Every decision is binding no matter whether it is reported in the regular series of Law Reports, or is unreported. Once you have the transcript, you can cite it as of equal authority to a reported decision. It behoves every counsel or solicitor to find, if he can, a case – reported or unreported – which will help him advise or win his case.” – Lord Denning.

Fewer than 20% of UK higher court cases are reported. Decisions of the Supreme Court and Court of Appeal predominate and only a small proportion of the thousands of first instance cases in the High Court are reported. Notwithstanding advances in digital technology, the majority of decisions remain unreported.

As any IP or lawyer who has worked with Manolete will know, most of our cases settle at ADR; usually mediation. Once Manolete is on board, whether as funder or assignee, the credibility and financial backing we bring to a claim usually results in the target coming to the table.

However, not all opponents settle and we then follow through to trial. Cases are reported when they are of interest, set a precedent or say something substantive about the law. Of the eight Manolete backed cases which have gone to trial in England and Wales, seven have been reported.

The reported cases are illustrative of the range of insolvency litigation claims financed by Manolete.

Hastings Borough Council v Manolete Partners Plc [2016] UKSC 50 arose out of the council’s exercise of its emergency powers to restrict public access to Hastings Pier. Manolete took assignment of the claim of Stylus Sports Ltd (in liquidation) which had leased units from the freeholder of the pier and operated a bingo hall and amusement arcade. The use of the emergency powers caused loss and damage to Stylus Sports Ltd and Manolete, as assignee, brought a claim for compensation under section 106 of the Buildings Act 1984. Section 106 provides for payment of compensation to be paid for loss to a business resulting from emergency action, but only where the owner or occupier of the premises was not in default.

The council defended the claim, alleging that Stylus had breached the Occupiers Liability Act 1974 which imposes a duty on an employer to ensure the safety of his employees and of the workplace. The defence was rejected at first instance by the Technology and Construction Court on the basis that the reference to “default” was limited to default in respect of obligations imposed by the 1984 Act itself. An appeal by the council to the Court of Appeal was dismissed ([2014] EWCA Civ 562). The judges unanimously dismissed an appeal by the council to the Supreme Court, holding that whatever Stylus’s position to its clients and employees, it was not “in default” as to the matter which led to the council’s exercise of its powers, and on that basis, Manolete was entitled to succeed in its claim for compensation.

The Hastings case was unusual, Manolete claims are more typically against the former directors of a company, as in Guy Mander and Dilip Dattani (as joint liquidators of Bowe Watts Clargo Ltd) v Jonathan Watts [2017] EWHC 7879 (Ch). Manolete funded the liquidators to bring claims against the former director in misfeasance, fraudulent breach and breach of fiduciary duty. The respondent had advanced company monies to connected parties which were not for the benefit of the company and had procured the company to make payments to himself. Registrar Jones (as he then was) held that the respondent had acted in breach of fiduciary duty in respect of advances to third parties made at times when the company was insolvent and made an award accordingly under section 212 Insolvency Act 1986. Registrar Jones held that the payments to the respondent were by way of loan, which lending was not a breach of fiduciary duty, but was repayable in debt. The consequence of the liability being in debt was that set-off would apply in respect of any monies owed by the company to the respondent; whereas no set-off can be applied to a liability to repay monies ordered to be paid in misfeasance¹. In reliance upon the decision of the Court of Appeal in Burnden Holdings (UK) Ltd v Fielding and another [2016] EWCA Civ 557, the Registrar rejected the claim by the Respondent that claims, in respect of payments to the connected parties which were made more than six years before the application notice was issued, were statute barred ².

The respondent was ordered to pay £353,087 together with interest @ 6% and costs.

The well-known case of Ball (Liquidator of PV Solar Solutions Ltd) and Anor v Hughes & Anor [2017] EWHC was the first occasion on which the court considered directors’ duties in the context of tax avoidance. The company entered into an EFRB scheme and, through a series of paper transactions, sums totalling £758,000 were credited to the directors’ overdrawn loan accounts.

The liquidator, funded by Manolete, advanced claims against the directors in misfeasance.

The directors defended the claims; they argued that the credits to their account were in fact remuneration, that the company was solvent when the sums were credited and that as shareholders they could ratify the credits and had a Duomatic defence to any breach of duty claim.

The credits to the overdrawn loan accounts were made in three tranches and, to succeed, the liquidator had to satisfy the court that the company was insolvent at the time of each credit, or of doubtful solvency such that the interests of the creditors intruded. This was most challenging on the first and earliest payment; there weren’t any unpaid creditors, but the directors had placed a large order with a Chinese supplier which was never paid, and which the directors knew could not be paid and, in all the circumstances, Registrar Barber (as she then was) was satisfied that the directors’ duties were owed to the creditors at the time of the first payment. The second credit was easier in that by this time there were unpaid creditors and by the time of the third and final payment there was clear evidence of insolvency.

The directors sought to rely on the (then) recent decision at first instance in Global Corporate Ltd v Hale EWHC 2277 (Ch) where the judge held that dividends paid to the sole director and shareholder which were challenged as being unlawful were, in fact, remuneration rather than dividends, therefore they could not be recovered under section 847 Companies Act 2006. The judge also held that it would amount to unjust enrichment if the company did pay the director for services provided. The consensus was that Global was an unsafe decision and it was overturned on appeal ³. In PV Solar, Registrar Barber preferred the decision in Guinness v Saunders [1990] 2 AC 663 which is authority that remuneration paid to a director without authority of the board and in breach of the company’s articles was repayable by the director.

Registrar Barber held that the directors’ duties were owed to the creditors of the company at the times when all the credits were made, that the directors had acted in breach of those duties and accordingly were liable pursuant to section 212 Insolvency Act 1986 to repay £758,000 together with compound interest and costs.

Brewer & Anor v Iqbal [2019] EWHC 182 (Ch) was a rare instance of Manolete funding the liquidators to bring a claim in breach of fiduciary and other duties against the former administrator. The administrator had sold specialist company assets, electronic programming guides (“EPGs”), to a connected party, ARY Network Ltd (“ANL”) shortly after his appointment, without obtaining a proper valuation of the assets, without carrying out any proper marketing exercise and without taking appropriate advice on marketing and sale. The assets were advertised for sale on Edward Symmons website under the heading “machinery sales” for seven days and were then sold to ANL for £40,000 plus VAT; being the value attributed to the assets by the directors.

Chief ICCJ Briggs held that the respondent had acted in breach of his duty to exercise reasonable care and skill when valuing, marketing and selling the assets; he took no appropriate expert advice and failed to recognise that the directors could not provide independent advice on timing, advertisement, price or any other matter whilst heeding their advice.

The judge also held the respondent to have breached the wider fiduciary duty concerning decision making as follows:

  1. The respondent’s admitted failure to act with “single minded” loyalty to the company as he was also acting in the interests of ANL. He chose not to expose the EPGs to the market for a reasonable time, his explanation being that the EPGs would be switched off, based on advice from the directors. This was evidence of serving two masters and failing to act with loyalty to the company.
  2. The judge held that the respondent failed to take account of matters he should have when deciding on the sale of the EPGs, namely the interests of creditors, and took account of matters he should not have, namely the perceived risk of switch off without making inquiry of BSB, the concern of winding up even though the Company was in administration and the director’s need to transfer money from abroad before the bank holiday weekend.

The judge assessed the award on the basis of equitable compensation for breach of fiduciary duty, accepting the award is measured by the objective value of the property lost, determined at the date when the account is taken and with the benefit of hindsight (Libertarian Investments Ltd v Hall [2014] 1HKC 368).

The judge accepted expert evidence brought on behalf of the liquidators that the current value of the EPGs was circa £2m, and, taking into account an appropriate discount for relevant factors, concluded that £743,750 represented equitable compensation for the breaches of equitable duty. An order was made for payment by the respondent of £743,750 plus costs.

In Bright Future Software Ltd, Manolete Partners Plc v Ellis 2020 EWHC 1674 (Ch), Manolete as assignee of the company and office holder claims, brought a claim against the former director Mr Ellis in wrongful trading. The company was incorporated in March 2012 and entered into CVL in February 2016 with a deficit of £10,962,916, the major creditors being the Regional Growth Fund (“RGF”) and HMRC.

The company was publicly funded by way of grants and repayable loans from the RGF totalling £4.8m paid to the company from April 2014 onwards. The public funding was to be matched by private investment of £10.2m. This was agreed in the form of a £10.2m facility between Mr Ellis and the company, of which approximately £2m was ultimately advanced by way of loan. The business of the company was development of software, provision of software services and the training of apprentices. The training was undertaken by an associated company of which Mr Ellis was also a director, the associate was also publicly funded by the Skills Funding Agency and entered into CVL in March 2016 with a deficit in excess of £1m.

The company was unsustainably loss-making throughout and consistently failed to meet its sales forecasts; by December 2014 sales performed at a level 90% below the sales forecast to the RGF during the due diligence process. Mr Ellis ceased to fund the company under the £10.2m facility from October 2014. By December 2014 the directors had fully drawn the RGF grant and resolved to draw down the RGF loan of £2m by the use of borrowing from the associate (whose funding was government money from the Skills Funding Agency).

The claim against Mr Ellis was in wrongful trading for the sum of £6,659,168 being the increase in the deficiency of BFS’ assets in the period January 2015 to February 2016. Had Mr Ellis ceased in January 2015 the net deficiency would have been £4,393,747 rather than the actual deficiency of £10,962,916.

The matter was tried by Richard Spearman QC sitting as a Deputy Judge of the Chancery Division in March 2020. The judge concluded that on the subjective test Mr Ellis did not know there was no reasonable prospect of the company avoiding insolvent liquidation.

On the objective test and without the benefit of hindsight, the judge found that Mr Ellis ought not to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation. The judge made this finding on the objective test because third parties had not expressed concerns. Dismissing the wrongful trading claim, the judge held that it would be very harsh on Mr Ellis if he was held liable for wrongful trading. In reaching his conclusions the judge relied on the monitoring carried out by the RGF with input from the company’s accountants and the fact that KPMG (approached in autumn 2015 in connection with a possible business arrangement) did not advise the directors in December 2015 to wind up the company.

There were two smaller heads of claim, a TUV/breach of duty claim in respect of the sum of £325,000 paid to Mr Ellis between May and September 2014 and a preference claim in respect of a payment of £188,769 to Mr Ellis in March 2015.

The judge dismissed the TUV claim and his conclusion for doing so was dependant on rectification of the £10.2m facility agreement. Dismissing the breach of duty claim, the judge did not conclude that between May and September 2014 BFS could not reasonably be expected to meet its liabilities; in particular because BFS’ accountants/RGF did not express concerns.

The preference claim succeeded.

The duties owed by the director of a company under the Companies Act 2006 and at common law are well known and have been considered in numerous cases. In contrast, there are few authorities on the position of a member of an LLP. One such authority is A&C Restoration LLP (in liquidation), Manolete Partners Plc v Andrew Michael Riches [2020] EWHC 1607 (Ch). Mr Riches was one of two members of the LLP. The LLP was governed by a partnership agreement dated 2 June 2008. Under the terms of the agreement, the members were entitled to draw £2,800 per month on account of profits.

Mr Riches retired from the LLP in 2017 and the terms of his retirement were set out in a retirement deed dated 10 October 2017. Immediately prior to the execution of the retirement deed, the LLP’s principal asset was a debt of £126,871 owed to it by Mr Riches. Under the retirement deed, the LLP was caused by Mr Riches and the other member to express an intention to waive the debt.

On 19 July 2018, the LLP entered into creditors’ voluntary liquidation with a deficiency to creditors of £259,940. The claims of the liquidator and of the LLP were assigned to Manolete on 20 December 2018. Manolete issued proceedings against Mr Riches claiming, inter alia, that he had acted in breach of duty.

ICCJ Jones held that:

  1. The assignment to Manolete was valid and Manolete was permitted to bring the claim in law.
  2. The duties owed by the designated members will include the same duties that directors owe to limited companies as set out in the Companies Act 2006 and also as a matter of common law and equity. Those duties involve a duty to take into account the interests of creditors at a time when the company is insolvent.
  3. At the time of the retirement deed, the LLP was hopelessly insolvent, the creditors were entitled to expect the designated members to recover the LLP’s debts, not to release them.
  4. Because the LLP was insolvent, the designated members, when deciding whether to include a waiver clause, had to consider the interests of the creditors.
  5. The entering into the retirement deed with a clause of waiver was a breach of fiduciary duty.

The judge ordered Mr Riches pay damages in the sum of £126,871, together with interest @ 8% per annum compounded in equity with quarterly rests and costs.

The Business and Property Court has worked very well throughout the pandemic and hearings have continued for the most part by Skype. The trial in Abdulali & Anor (as joint liquidators of Smith Technologies Ltd) v Pearson & Mackie [2020] All ER (D) 120 (Apr) was listed for four days commencing on 31 March 2020. The liquidators were funded by Manolete. On 23 March, in connection with the escalating COVID-19 situation, ICCJ Jones directed that the trial should go ahead “electronically” and invited the parties to look into this possibility and to contact the court as soon as possible. The respondents made written submissions to the court seeking an adjournment for a number of reasons including:

  1. Difficulty in taking instructions remotely
  2. Respondents and their legal team had no prior experience of using Skype
  3. Respondents and their solicitors had insufficient work space at home
  4. Counsel for the respondents could not conduct the trial effectively at home with children present
  5. Mr Pearson was self-isolating
  6. Mr Mackie had poor internet connection, was unwell and was self-isolating

The liquidators contended that a remote trial should be possible using video conferencing facilities.

Following the written submissions, there was a Skype CMC. The evening before the CMC the respondents’ solicitor filed a witness statement explaining that Mr Mackie’s symptoms had worsened and he could not participate in a trial or give instructions. ICCJ Jones made it clear his decision would be made on the basis that the trial must be fair and any injustice avoided. As to the respondents’ points, the judge decided as follows:

  1. Instructions can be taken without anyone hearing them during trial using mute on Skype and mobile phones.
  2. Solicitors are going to have to act quickly, they need to practice Skype and put in place procedures to enable them to be effective trial lawyers, this is not difficult technology.
  3. One has to be realistic about space. The judge found it very difficult to accept there will not be space to follow the trial and give instructions by phone, subject to individual circumstances concerning families and individual accommodation.
  4. The judge was satisfied that the measures that can be put in place will alleviate the problems young children can cause and through discussions between counsel/solicitors the appropriate measures can be achieved.
  5. On Mr Pearson’s poor internet connection, the judge did not anticipate that those matters cannot be resolved.
  6. The judge considered an issue (which he thought had become academic because of the approach taken to case management) as to whether counsel can rely upon their personal commitment/problems, having accepted a brief and favoured the analysis that counsel is to decide whether to accept or to return the brief if problems mean they cannot fulfil the brief. The court would then need to address whether the trial can go ahead in those circumstances.

The judge gave various directions for conduct of a remote trial and asked the respondents’ solicitors to update the court on 30 March as to Mr Mackie’s COVID-19 symptoms, medical condition and ability to give instructions, following which he would make a final decision as to whether the trial could proceed as scheduled.

On 30 March the respondents’ solicitor filed a further witness statement stating that Mr Mackie’s health had deteriorated. The judge adjourned the trial and it was relisted for 27 April 2020.
The trial proceeded by Skype, being of claims in breach of duty and the liquidators succeeded. The main judgment is not reported, but the findings of ICCJ Prentice on the refusal by the respondents to mediate despite repeated requests, and the consequences in costs, are well worth noting:

“This was a case in which, frankly, I have been very surprised to learn that there was no mediation. It is a case about money (I know, as well, that the respondents felt their reputations were on the line but, ultimately, it came down to money) and therefore it is a claim which is highly susceptible to successful mediation. It seems to me that it was essential in this case that there should have been a mediation and an attempt to save costs, which have been very substantial, and save as well, so far as it is relevant, of court and judicial time. That failure from the correspondence rests with the respondents.

The question, then, is how that should be reflected in the costs order. Standing back, it does not seem to me just that the result of the failure - which would be visited on the respondents anyway because the amount of costs they are going to have to pay will have been greatly increased - should have been that the 20 per cent deduction, to which I think they would otherwise be entitled, should be wiped out. What I do intend to impose instead, reflecting the failure to mediate, is this order, which is that the respondents will be liable to pay 90 per cent of the liquidators’ costs. That would be on the standard basis.”

In the wise words of Lord Denning, the judgment of ICCJ Prentis is of equal authority to a reported decision. It should encourage parties who are reluctant to mediate to do so. At Manolete, we have demonstrated commitment to trial where necessary, but our objective remains negotiated settlement to achieve optimum realisations.

¹ Manson v Smith (liquidator of Thomas Christy Ltd [1997] 2 B.C.L.C.161
² An appeal against the Court of Appeal decision in Burnden was dismissed by the Supreme Court, [2018]UKSC 14
³ Global Corporate Ltd v Stefan Hale [2018] EWCA Civ 2618

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Manolete's Latest Recruits

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Graham Briggs, Consultant

Graham joined Manolete in September 2020 as a consultant for the Yorkshire region. Graham qualified as a solicitor in 1984 and practised for the whole of his career at the Leeds offices of Addleshaw Goddard. Graham has specialised in all aspects of insolvency law since the advent of the Insolvency Act 1986. He has long been recognised by Legal 500 as a ‘leading individual’ in the field. Graham lives locally and has a wide range of connections with the Yorkshire region.

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James Bull, Assistant Director – Finance

James Bull joined Manolete in September 2020 as Assistant Director – Finance. James began his career in the RSM London audit team in 2013 and qualified as an ICAEW Chartered Accountant in 2016. He moved into the RSM London due diligence team in 2017 where he spent three years leading financial due diligence on businesses in the mid-market as a manager within the team.

Manolete, Headline Sponsor for TRI Conference
9 December 2020

Manolete is delighted to resume its headline sponsorship for the Turnaround, Restructuring and Insolvency (TRI) 2020 Conference. It is an excellent forum attracting turnaround specialists, insolvency practitioners, solicitors and barristers.

To book your place at this year’s conference, please click here to visit the TRI Conference 2020 website.

Time and Time Again
By Stephen Baister

In his eponymous Jackson Report, Jackson LJ complained that “[C]ourts at all levels have become too tolerant of delays and non-compliance with orders. In so doing they have lost sight of the damage which the culture of delay and non-compliance is inflicting on the civil justice system. The balance therefore needs to be redressed”. And it was. And again we managed to lose sight of the damage that inflicted on civil justice.

There are plenty of cases about the consequences of missing time limits. Most of us will have gratefully forgotten the case of Venulum Property Investment v Space Architecture [2013] EWHC 1242 (TCC) in which the court refused an application for permission to extend time for service of particulars of claim, relying on the “stricter approach that must now be taken by the courts towards those who fail to comply with rules”. Most of us have not quite yet been able to wipe from our memories Mitchell v News Group Newspapers Ltd [2014] 1 WLR 795 and Denton v TH White Ltd [2014] 1 WLR 3926, but it’s only a matter of time. These enthusiasms for strict discipline wax and wane.

But it’s a different matter when it comes to paying your debts on time. The system falls over backwards to help the defaulting debtor while doing all it can to delay justice for the creditor. The Pre-Action Protocol for Debt Claims which came in in 2017 is a charter for anyone wanting to avoid paying what he owes. To add insult to injury, the great minds behind the CPR recently erected another obstacle to getting paid. This time it’s a barrier to getting a default judgment.

The CPR have now been amended so that that an acknowledgment of service or defence that has been filed late can be a bar to getting a default judgment. So the tardy defendant wins again; and the creditor loses out again.

Wasn’t it Ian Hislop who once said, “If that’s justice, I’m a banana”?

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