Circularity Argument Fails Again On An Insolvency Assignment

The case of Manolete Partners PLC v Freed & Ors (Re Just Recruit Group Ltd – Insolvency Act 1986) [2024] EWHC 2242 (Ch) (“the Freed Case”) fleshes out a number of consequences of a breach of fiduciary features. However, this post is confined to the fascinating facet of the matter of circularity notwithstanding the potential that monies paid over could lead to a surplus to be repaid to a paying respondent if they had not been assigned.

Mr Freed was not freed of the obligation to repay sums to Manolete in full, the well known litigation funder and also assignee of Insolvency Practitioner causes of action.

The defence of circularity failed.

What Is The Circularity Argument?

In this matter, Manolete sought repayment of payments made by Just Recruit Group Ltd to two connected companies amounting to £240,000 and £678,590.18.

The court here found Mr Freed liable to pay these sums back due to a breach of duty. Ultimately the structure of the causes of action was a combination of the usual antecedent transactions with an additional feature of knowing receipt.

The argument that sometimes is made is where there are causes of action a director could be ordered to repay to a company, that to avoid money going around in a circle the court may limit the relief to the costs and expenses of the insolvency and claims of creditors. This point was deciphered in an article which included consideration of another Manolete case called How Much Can A Liquidator Recover?.

However, the problem with this argument is whilst it might apply to a liquidator or other officeholders who would be left with a surplus to return to a respondent director who was also a shareholder, it does not necessarily apply to an assignee of such a claim. 

Assignee Can Do No Better Than Assignor

Counsel for Mr Freed however submitted the assignee of an action could not do better than the assignor. 

The case of Darlington Borough Council v Wiltshier Northern Ltd [1994] EWCA Civ 6 was highlighted for this purpose as was Lomas & Ors (Joint Administrators of Lehman Brothers International (Europe)) v Burlington Loan Management Ltd & Ors [2016] EWHC 2417 (Ch) when the following point was made:

The summary in Snell’s Equity, 33rd ed. (2015) para 3-027 suffices for present purposes:

“In general, an assignee cannot recover more from the debtor than the assignor would have. The purpose of the principle is to prevent the assignment from prejudicing the debtor. This would happen if, for example, he had to pay damages to the assignee that he would not have had to pay to the assignor if the assignment had not taken place…Put figuratively, the transferee is entitled to the tree planted by the transferor and such fruit as had grown and would grow on it when transferred, and not to fruit of a different variety or quantity which might have grown had the transferee planted the tree.

Judgment Highlights

The judge then considered the rationale of the other earlier Manolete case and he said:

It does not seem to me that the decision of Zacaroli J was inconsistent with prior or higher authorities. He expressly declined to decide that there was no jurisdiction to impose the Proviso imposed by the ICC Judge. He did however decide that the principle that an assignee stands in the shoes of the assignor did not justify the imposition of a cap on recovery in circumstances where an office-holder had assigned his or her claims to a third party. The question was not one of the extent of the cause of action, but whether it was right to exercise a discretion to limit recovery. It was wrong in principle to deprive an assignee of any part of the proceeds by exercising a discretion intended to prevent proceeds from reaching persons tainted by wrong-doing.

Here the claimant is not seeking to “tack on” a cause of action or head of loss other than that assigned to it. It is pursuing nothing more than the statutory and other causes of action assigned by the joint administrators. The question is whether, in framing relief, the court should restrict its recovery. Mr Willson is right to say that, aside from pointing to the cases on assignment and the broad principle that an assignee cannot claim more than his assignor, which is not in fact of application here, the respondents have pointed to nothing to identify a principle that recovery should be so capped in these circumstances. Indeed, as Mr Willson submitted, the scheme of the Small Business, Enterprise and Employment Act 2015, which introduced the right to assign statutory causes of action, would suggest that it should not.

…

In my judgment Mr Willson is correct in his submissions. Assuming that I have a discretion to limit recovery as suggested by the Defendants I would decline to do so. The payments ought not to have been made and my starting point is that the Defendants should meet the loss caused in full. Certainly in the case of the claims under section 238 and 239 IA 1986 the purpose is to permit recovery of property that should not have been paid away. Similarly, in the case of the breach of duty the court must consider what the consequence of the breach of duty would be. This is a misappropriation case and the general principle is that the aim is to restore the property wrongly paid away (see Davies v Ford [2021] EWHC 2550 (Ch) at paragraphs 106 to 107, per David Holland QC). The consequence of the breach of duty is that payments that should not have been made were made. Again, on the face of it the starting point is that Mr Freed is liable for the whole loss caused.

In this case there been a lack of candour on the part of the director and controlling mind of the recipient companies as to the insolvent company’s affairs. In the case of a claim brought by an office-holder the repayment of the monies in full would allow the monies to be dealt with in the course of administration and distributed when the affairs of the company are fully investigated and the extent of its assets and liabilities are known. That may, or may not, result in a return being made to a defendant as creditor or shareholder. That is, after all, what would have happened if the improper payments had not been made in the first place. I can see that in a clear cut case where there is no doubt as to the assets and liabilities of the company and one can say with some certainty that the defendant will simply receive back a proportion of a sum that they might otherwise be ordered to repay it might be appropriate to restrict recovery so as to prevent a “money-go-round” if there is no prejudice to other creditors. This is not such a case.

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 noted in Totalbrand there is a public interest in wrong-doers being pursued and standards of corporate governance upheld. To place a limitation on recovery in the form proposed by the Defendants would discourage the pursuit of claims that the 2015 Act was intended to facilitate, as well as reducing the sums available for other creditors. In the circumstances I decline to impose such a limitation. I will direct that the sums be paid in full. If any part of them does fall in due time to be repaid to a defendant, that will be a question for the office-holder at the conclusion of the administration of the company’s affairs.