Litigation funder wins nearly £1m in D&O claim

Manolete Partners Plc, an insolvency litigation finance company, has successfully claimed against the former director of Just Recruit Group Ltd (Just Recruit) and awarded £918,590. The Insolvency and Companies Court of the High Court found that the director of Just Recruit, Norman Freed, had breached his directorial duties to the company during the business's financial collapse.

Background

Just Recruit was a recruitment agency based in St Albans and went into administration on 29 January 2021 due to its inability to pay debts of £1.2m. However, Mr Freed made several payments totalling £918,590 to two companies in the months preceding Just Recruit's collapse. The two companies to receive the payments were Key People Ltd and Achieva Group Ltd, both are also St Albans based recruitment firms.

Key People has now been purchased by Achieva Group and was an unsecured creditor when Just Recruit entered administration. A total of £240,000 was paid by Just Recruit to Key People between 9 October 2020 and 14 December 2020 as part of a "long-standing arrangement" whereby administrative and financial support were provided by Key People to Just Recruit. According to the companies, Key People billed Just Recruit £100,000 on a quarterly basis for its support.

A total of £678,590 was paid to Achieva Group between 17 December 2020 and 24 December 2020 from Just Recruit. Achieva Group later bought the assets and business of Just Recruit for £50,000 in a pre-pack administration deal.

A claim was brought by the administrators of Just Recruit against Mr Freed for breaching the Insolvency Act 1986 by prioritising the interests of Key People and Achieva Group over those of other creditors. Manolete Partners agreed to an assignment of the legal claims from the administrators in 2021.

Decision

Judge Mark Mullen found that Mr Freed did breach his duties as a company director by making the payments. He said that "the only conclusion that can be formed from the evidence that I have seen 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 Group and leave the debts of unconnected creditors in the company." There is a legal presumption that the payments made to Key People and Achieva Group unfairly favoured them over other creditors. Judge Mullen added "were that presumption not engaged, I would nonetheless be satisfied that the payments were influenced by a desire to prefer by reason of the fact that entities connected to Freed received payments while unconnected creditors did not…the conclusion that there was an intention to prefer is inescapable."

The Judge referred to the Supreme Court's decision of Sequana BTI v Sequana [2022] noting that that it is not open to the shareholders of a company to ratify a breach of the duty to consider the interests of creditors at a time when the company is already insolvent or bordering on insolvency.

The Court also rejected the defendant director's argument that his liability should be limited to the shortfall in the administration of the company. The director sought to rely upon the "circularity defence" which is sometimes deployed to argue that to avoid monies going around in a circle the Court can cap the relief obtained by the Claimant to the costs and expenses of the insolvency practitioner. However, in this case, the Court was not persuaded that there was "true circularity" as the claim had been assigned to a litigation funder. The Judge held that, "where the office-holder has assigned a cause of action such a restriction will cause prejudice to creditors while allowing the Defendants to retain a greater proportion of the proceeds of the wrongdoing. It also would prejudice the claimant, as an innocent third party purchaser of the claim, and has the potential more generally to discourage potential purchasers of claims from doing so."

As a consequence, Mr Freed was ordered to pay the entirety of the compensation awarded, being £918,590 (the total paid out to Key People and Achieva Group prior to Just Recruit's collapse). Key People and Achieva Group were ordered to share the liability of the amounts they both received from Just Recruit.

Comment

The Court's rejection of the "circularity defence" on the basis that the cause of action had been assigned to a litigation funder means that where a funder is involved directors of insolvent companies are less likely to be able to limit the redress amount payable. In this case the Judge was mindful that, "to place a limitation on recovery in the form proposed by the Defendants would discourage the pursuit of claims…"

The successful outcome for Manolete Partners was handed down days before the release of their financial results for the year to 31 March 2024. The funder announced pre-tax profits of £2.5m and an 18% increase in new case investments – a company record. These results follow a loss of £3.1m in 2022, a consequence of Covid legislation protecting businesses from insolvency. The Insolvency Service's most recent report reveals that company insolvencies remain high, with there being 16% more insolvencies in July this year compared to in July 2023 and it appears that litigation funders are capitalising on this development.

This decision is another reminder to D&O insurers that there are litigation funders willing to fund claims against D&Os deemed to have breached their fiduciary duties. Especially in light of the recent economic climate and the increase in insolvencies, there is potential for such funders to further target directors who may have breached their duties prior to the company's collapse.

To read the judgment, please click here.