Returns to an assignee should not be limited to the shortfall in the estate

In this case, it was alleged was that the director of Just Recruit Group had caused a total of £240,000 to be paid to Key People Limited, and £678,590.18 to Achieva Group Limited.

Those payments were alleged to have been made in breach of duty, and as against the recipients, transactions at an undervalue or alternatively preferences to the extent the recipients were creditors.

Prior to issue, Manolete Plc had taken an assignment of the company’s claims from the administrators on terms that some of the proceeds received would be paid back into the estate. The court found all three defendants liable. The question then became whether the awards should be capped to the level of the shortfall in the estate, which was estimated to be only around £350,000, to avoid the money going around in a circle. This was because the second defendant was a shareholder of the company, and it was argued if all £918,590.00 was ordered to be paid into the estate. A surplus of £474,103.33 would then arise which would flow back to Key People Limited as member.

This was rejected. The starting point was that the loss caused should be restored in full. The court might have some discretion to limit the award, but in this case to restrict an assignee’s recovery to the shortfall would mean the defendants retain the proceeds of their own wrongdoing to the detriment of the creditors. In this case, capping the award to the shortfall would have resulted in creditors not being paid in full at all, because the net proceeds of the litigation (after taking into account both the costs and the commercial terms of the assignment itself) would have led to them only receiving a partial distribution. In a case such as this, the correct outcome would be that the entire liability should be paid, and if a surplus became available for distribution to members, that was a matter for the office holder to deal with in due course.

The outcome was the same as it had been in Manolete v Hope [2022] EHWC 1801. On appeal, Zacaroli J considered it was wrong as a matter of principle to simply cap recovery to the amount required to satisfy all debts costs and expenses of the insolvent company just because the claim had been assigned by a liquidator to a funder. He also observed that in many cases there would be real practical difficulties in a court to capping awards based on an unquantified surplus.

In reference to the matter of Manolete Partners Plc v Freed and others [2024] EWHC 2242 (Ch).

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