Manolete Partners Plc v Norman Freed

Hearing dates: 19 th to 22 nd March 2024

Approved Judgment

This judgment was handed down remotely at 11am on 30 th August 2024 by circulation to the parties or their representatives by e-mail.

ICC JUDGE Mullen

On 19 ^th July 2022 Manolete Partners plc (“Manolete”) issued two sets of proceedings, the first being an application under the Insolvency Act 1986 (“IA 1986”) in the Insolvency and Companies List (ChD) and the second being a Part 7 claim in the Business List (ChD). Each set of proceedings named as respondents (in the case of the application) or defendants (in the case of the claim):

i) Mr Norman Freed (“Mr Freed”);

ii) Key People Limited (“KPL”); and

iii) Achieva Group Limited (“AGL”)

(collectively “the Defendants”).

Manolete claims as the assignee of Mr Miles Needham and Mr Simon Carvill-Biggs, the joint administrators of Just Recruit Group Limited (“JRGL”), which entered administration on 29 ^th January 2021. The relevant causes of action were assigned to Manolete on 26 ^th November 2021.

The two sets of proceedings have been consolidated and are supported by a single particulars of claim (“the Particulars”). There does not appear to be an order that the Particulars stand as points of claim in the Insolvency Act application but the parties appear to have treated it as so doing and the Defendants have filed a defence to which Manolete has filed a Reply.

The Particulars allege that Mr Freed, as director of JRGL, caused payments to be made by JRGL between 9 ^th October 2020 and 24 ^th December 2020 as follows –

i) Payments were made to KPL

a) on 9 ^th October 2020, in the sum of £120,000; and

b) 14 ^th December 2020, again in the sum of £120,000,

totalling £240,000 (“the KPL Payments”).

ii) Payments were made to AGL:

a) on 17 ^th December 2020, in the sums of £600,000, $37,000 (£29,395.14) and €5,000 (£4,253.02);

b) on 18 ^th December 2020 in the sum of CHF2,500 (£2,042.42); and

c) on 24 ^th December 2020 in the sum of US$54,000 (£42,899.60),

totalling £678,590.18 at the exchange rates given in the Particulars (“the AGL Payments”).

Those payments are said to have been made in breach of the duties that Mr Freed owed to JRGL under sections 170 to 179 of Companies Act 2006 (“CA 2006”) and, in particular, in breach of his duty to consider or act in the interests of JRGL's creditors at a time when he knew, or ought to have known, that the company was, or was likely to become, insolvent. The Particulars allege that the company was in fact unable to pay its debts for the purposes of section 123 IA 1986 by 9 ^th October 2020 or, alternatively, 11 ^th December 2020.

The latter date is when JRGL contacted Mr Needham, an insolvency practitioner at FRP Advisory Trading Limited (“FRP”). A meeting was held on 18 ^th December 2020 when, it seems, Mr Needham confirmed that the company was insolvent. The company went into a pre-pack administration a little over a month after the meeting. Its assets and business were sold to AGL under a sale and purchase agreement dated 29 ^th January 2021 (“the SPA”), negotiated between JRGL, the proposed administrators and AGL between the meeting with Mr Needham and filing of the notice of appointment of the administrators.

The SPA provided that JRGL's business and assets would be transferred to AGL for £50,000. This was price was made up of £30,000 by way of what was described as “Initial Consideration” and £20,000, described as the “Preferential Debt Payment”, to cover assumed liabilities to HM Revenue and Customs (“HMRC”), which were to remain with the company, along with other non-crystallised, contingent or uncertain liabilities. A debt said to be due to KPL was also to remain with the company.

Following their appointment, the joint administrators say that they became aware of the KPL Payments and the AGL Payments and also discovered that JRGL had further liabilities that were not assumed by AGL under the SPA. These included liability under proceedings in the Employment Tribunal, brought by Mr Scott Neto, a minority shareholder in JRGL, which led to a judgment being entered against the company in the sum of £100,442 on 16 ^th March 2021, and a liability of £125,254.17 to HMRC. The estimated deficiency to creditors, according to the joint administrators, is £1,216,529.54, though this is denied by the Defendants.

The proceedings seek equitable compensation against Mr Freed for £918,590 for breach of duty in causing the payments to be made. The Particulars also set out claims against KPL and AGL, first contending that the payments made to those companies were transactions at an undervalue for the purposes of section 238 IA 1986, having been made for no consideration within two years of JRGL entering into administration and at a time when it was unable to pay its debts or became so as a result of the payments. In this regard, Manolete says that KPL and AGL were “connected with” JRGL for the purposes of section 240(2) so that the insolvency of JRGL is presumed unless the contrary is shown.

To the extent that KPL and AGL were creditors of JRGL and the payments represent the payment of debts, it is alleged that the payments constituted preferences within the meaning of section 239 IA 1986. In such a case, Manolete must show that the payments were made within the prescribed statutory period at a time when JRGL was unable to pay its debts, or became so as a result of the payments and that, in making the payments:

i) JRGL put KPL and/or AGL into a better position than they otherwise would have been in had JRGL gone into administration without making the payments; and

ii) in doing so, JRGL was influenced by the desire to have that effect.

Manolete again relies upon its allegation that KPL and AGL were “connected with” JRGL so as to give rise to the presumption provided for in section 239(6) IA 1986 that JRGL was so influenced. Further or alternatively, it is alleged that the KPL and AGL are liable for knowing receipt of the sums that Mr Freed caused to be transferred in breach of duty.

The defence in relation to the KPL Payments is that KPL supported JRGL by making payments to JRGL's creditors when JRGL could not and JRGL would reimburse KPL either directly or, at KPL's instruction, by making a payment to AGL. It is also said that there was an arrangement whereby JRGL was invoiced by KPL on a quarterly basis for £100,000, plus VAT, made up of administration fees charged by KPL and fees for its directors, Mr Atherton and Mr Donavan. The Defendants maintain that they are unable to evidence or further particularise these payments without sight of JRGL's documents, which are alleged to be in the hands of the joint administrators. The extent of the records delivered to the joint administrators is one of the issues to be resolved.

In relation to the AGL Payments it is said that these payment were made at the direction of Mr Moshe Freed, Mr Freed's nephew and the finance director of the group, on behalf of KPL, either by way of repayment of sums paid by KPL to JRGL's creditors or to support AGL to pay JRGL's former employees' salaries and to meet JRGL's contingent liabilities, including those under its lease. Again, it is said that these cannot be evidenced or particularised without access to JRGL's records.

Thus the Defendants say that the payments were made for consideration because they were genuine liabilities of JRGL arising from KPL meeting its obligations when JRGL could not. There was no intention to prefer because the company did not have any creditors other than a debt owed to KPL in the sum of £474,103.33, which was not intended to be called in and a small debt to HMRC, which was covered by the Preferential Debt Payment and would in any event reduce when the joint administrators reclaimed input tax. Indeed, the Defendants say that it was made clear to Mr Needham from the outset that all creditors were to be paid and Mr Needham was content on this basis for creditors to be paid from various sources, referring to the payments as a “melange”. The payments to KPL and AGL were therefore neither at an undervalue nor were they preferences. Any further deficiency is said to be the result of the joint administrators failing to:

i) defend a claim brought in the Employment Tribunal by a Mr Scott Neto, a minority shareholder in JRGL, which led to a judgment being entered against the company in the sum of £100,442 on 16 ^th March 2021; and

ii) reclaim input VAT from HMRC.

In respect of Mr Freed, it is further said that any breach of duty by him was ratified by JRGL's shareholders and, in any event, he acted honestly and reasonably and ought fairly to be excused under section 1157 CA 2006. In the event that those arguments are not successful, the Defendants argue that recovery by Manolete should be limited to the sums necessary to meet the shortfall in the administration, insofar as the shortfall arises from sums owed to unconnected creditors, which they estimate at £350,000.

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