Pushing the limits of directors’ liability

Directors’ fiduciary duties – the duty of acting in good faith and best interests of the company – still apply when a company enters administration.

In this article, Sarah Farish, associate in our banking and restructuring team, summarises a recent case in which an attempt was made to sideline directors’ duties.

Background

Just Recruit Group Limited (in administration) (Just Recruit) was a temporary employment agency and Norman Freed was its director. Just Recruit entered into administration on 29 January 2021.

On 26 November 2021, the administrators of Just Recruit assigned claims in the value of c.£1million for breach of directors’ duties, knowing receipt, transaction at undervalue and preference to Manolete Partners plc (Manolete).

The assigned claims were that the director caused payment to be made between 9 October 2020 and 24 December 2020 to Key People Limited and Achieva Group Limited at a time when he knew (or ought to have known) that Just Recruit was insolvent, in breach of his duties as a director

Manolete issued two claims against the director, Key People Limited and Achieva Group Limited.

The defendants argued that if they were liable, the quantum (total liability) should, in any event, be limited to the amount of shortfall to creditors in the administration proceedings.

This was estimated to be c.£350,000, substantially less than the value of the claims.

Judgment

Among other things, the judge dismissed the defendants’ arguments that their liability should be limited to the shortfall in the administration.

The Judge also held that:

“the only conclusion that can be formed is that the payments were, at best, made without proper consideration of the interests of creditors and, at worst, a cynical scheme to abstract funds from [Just Recruit] and leave the debts of unconnected creditors in the Company”.

Held

The shareholders of a company are not entitled to ratify a breach of duty at a time where the company is insolvent or bordering on insolvency (a key ruling from the landmark BTI v Sequana judgment.

The judge held:

• That imposing a limit on recovery would discourage the pursuit of claims that the Small Business, Enterprise and Employment Act 2015 was intended to facilitate;
  
  
• That there is a public interest in wrongdoers being pursued and the standards of corporate governance being upheld (Re Totalbrand (in liquidation) [2020] EWHC 2917 (Ch)); and
  
  
• This was not a case of “true circularity” or a “money-go-round” which might, in some cases, warrant such a limitation on recovery as Manolete had taken the risk in bringing the claim and should be entitled to recovery as to not discourage purchasers going forward.

As a consequence, Mr Freed was ordered to pay the entirety of the compensation awarded, being £918,590.

Commentary

The surplus situation will likely be rare. The insolvency regime provides that any surplus will be distributed back to members, who are usually connected parties in such claims in any event.

This then raises a question as to whether it is worthwhile trying to claim over and above the shortfall in the first place.  

This case also reminds us that when attempting to limit liability, the courts will generally hold wrongdoers accountable for their actions.

The Judge’s comments on the circularity defence were a welcome decision by the office-holders and funder alike, as it evidences that the funding of such cases is necessary in situations where the insolvent estate is unable to bring such claims in favour of the creditors. Funders such as Manolete can be the only option.

For more information, please contact Sarah using 0191 211 7898 or [email protected].