LexisNexis Corporate Rescue and Insolvency: Case Alerter – October 2024

At-a-glance cases provided by Gatehouse Chambers’ Insolvency Team, featuring:

• Fox v Brent [2024] EWHC 2179 (Ch)
• PK Investments Limited v Sebajeevan Sabaratnam and Others [2024] EWHC 2188 (Ch)
• Nillson v Cynberg [2024] EWHC 2164 (Ch)
• Manolete Partners Ltd v Freed & Others [2024] EWHC 2242 (ChD)

Read the latest CRI Cases Alerter authored by Alaric Watson, Philipp Simon, Rob Hammond and Adam Smith-Roberts

Fox v Brent [2024] EWHC 2179 (Ch)

This appeal concerned a property (P) purchased in 2006 by Mr Brent (B) and legally registered in his name, which ICCJ Jones found was held on bare constructive trust for B’s daughter (A) and therefore did not form part of B’s bankruptcy estate. P was purchased in the context of the breakdown of B’s relationship with A’s mother (C), who has lived with A at P since 2006.

B’s trustees in bankruptcy sought to appeal on four grounds:

• there was no or no sufficient reliance or detriment suffered by A (as opposed to C);
• there was no agreement or common intention that P would be held on trust for A;
• if A could rely on C’s reliance and detriment, that too was insufficient;
• no constructive trust could arise where the beneficiary, A, was only two years old at the time.

Permission to appeal was granted on paper for grounds 1 and 3. Edwin Johnson J refused permission to appeal on ground 2, allowed permission to appeal on ground 4, but dismissed the appeal (grounds 1, 3 and 4). Properly construed, the judgment below had found that, in the agreement that formed the common intention between B and C, C was at all times acting on behalf of and forthe benefit of her daughter, A, and that the reliance and detriment had therefore been A’s, acting through C; those findings were not perverse and were conclusions open to ICCJ Jones. Although the application for financial support, pursuant to Sch 1 to the Children’s Act 1989, that C compromised on the strength of the agreement with B regarding P could only have been brought by C, it was nevertheless for the benefit of A and the reliance was therefore A’s (acting through C). Detriment, and especially balancing detriment against advantage, is a question of fact on which an appellant court can only interfere in very narrow circumstances (Winter v Winter [2024] EWCA Civ 699), which did not pertain here.

The case is of interest both for its consideration of the extent to which appellate courts may interfere on findings of fact (cf. Volpi v Volpi [2022] EWCA Civ 464, cited here), but also in regard to the complex interrelationship between issues arising in the bankruptcy courts and those in the family courts.

PK Investments Limited v Sebajeevan Sabaratnam and Others [2024] EWHC 2188 (Ch)

The case involves a summary judgment sought by PK Investments against Mr Sabaratnam, the former director of Finno Medical Limited, in liquidation. PK Investments claims that Mr Sabaratnam breached his director duties under the Companies Act 2006, specifically s 172 (duty to promote the success of the company) and s 174 (duty to exercise reasonable care, skill and diligence).

Finno Medical imported medicines into the UK but faced insolvency in 2017, with significant deficiencies leading to its compulsory liquidation in December 2018. PK Investments, a creditor of Finno Medical, alleged that Sabaratnam caused the company to make questionable payments totalling nearly £900,000 to companies in Hong Kong and other entities without sufficient due diligence or contractual documentation. These payments offered no commercial benefit, and the liquidator’s investigation revealed no records or agreements to justify them.

PK Investments argued that the payments were made while the company was insolvent, violating the duty to act in the best interest of creditors. Despite multiple requests from the liquidator, Sabaratnam failed to provide evidence supporting the legitimacy of the transactions. His defence claimed the payments were in good faith, made to source medical devices from foreign companies, but lacked the necessary documentation to substantiate this claim.

The legal significance of this case lies in the court’s application of directors’ duties under UK law. The judgment highlights the importance of fiduciary responsibility, especially when a company is insolvent or on the verge of insolvency. The case also demonstrates the consequences directors face when failing to act with reasonable care or to maintain proper documentation to support business decisions, especially when managing creditor risks during insolvency.

The court ruled in favour of PK Investments, concluding that Sabaratnam breached his duties and caused financial loss to the company. This case reinforces the critical obligation directors have to creditors and the necessity for transparency and due diligence in all financial transactions.

Nillson v Cynberg [2024] EWHC 2164 (Ch)

Common intention constructive trust is sufficient “subsequent agreement” to vary earlier express trust.

In 2001, Husband and Wife bought a “ joint names” home, subject to an express trust (the Home). Upon separating in 2009, they reached an informal understanding: the Wife would have 100% of the beneficial interest in the Home but would pay all costs associated therewith (the Informal Agreement); she also paid for later home improvements.

Divorced followed in 2018, with the Husband declared bankrupt later that year. His Trustees in Bankruptcy (TiB) asserted a 50% interest in the Home.

In response, the Wife obtained declarations that the Informal Agreement created a common intention constructive trust (CICT) and/or proprietary estoppel, such that she was sole owner from 2009. The TiB appealed.

Stack v Dowden provides that express declarations of trust are conclusive, save where varied by “subsequent agreement” [32]. This encompasses proprietary estoppels but is ambiguous as to subsequent agreements outside the Law of Property (Misc. Provisions) Act 1989’s formalities (LP(MP)A) [34].

Bahia v Sidhu and Clarke v Meadus suggested that LP(MP)A compliance is not necessary [35-42]. Re Iqbal (Nilsson v Iqbal) suggested it is, such that later CICTs are inoperative [45].

The High Court held that CICTs contemporary to or pre-dating an express trust cannot override the same. To override, subsequent agreements nonetheless need not satisfy the LP(MP)A. Informal agreements – such as CICTs – suffice [48].

This avoided arbitrary distinction between equities arising by CICT and those “arising by way of that very similar beast”, estoppel [49]. Such distinction did not, in any event, follow from the relevant legislation or Stack.

Further, no proprietary estoppel arose until the Wife suffered detriment rendering unconscionable the Husband’s reneging on his assurances [76-80]. The Wife’s payment of the mortgage and home improvements, and refraining from brining ancillary relief proceedings (which would likely have given her 100% of the Home’s equity) amounted to such relevant detriments [59-61]. It was therefore unconscionable for her to receive only 50% from 2009, which is when the estoppel arose [66-67].

Appeal dismissed accordingly.

Manolete Partners Ltd v Freed & Others [2024] EWHC 2242 (ChD)

This was a claim brought by the litigation funders Manolete Partners Ltd (Manolete) involving an interesting argument about limiting the liability of the defendants to the shortfall in the administration.

Manolete had taken an assignment of the right to pursue claims from the joint administrators of Just Recruit Group Limited (JRGL). The claims were for equitable compensation for breach of duty against a former director of JRGL, Norman Freed, as well as the return of sums paid to two companies connected to JRGL on the grounds they were transactions at an undervalue and/or preferences. The total claimed was £918,590.

The claims against the companies were defended on the grounds that that the sums paid were paid for consideration in that they effectively amount to a loan. Mr Freed defended himself on the basis his action had been ratified by JRGL’s shareholders and, alternatively, he shough relief under s 1157 of the Companies Act 2006.

ICC Judge Mullen ultimately found no difficulty in concluding the companies were not supported by consideration and were transactions at an undervalue (or alternatively preferences if he was wrong about that) (paras 100-103 and 116-116). He also had no trouble concluding Mr Freed acted in breach of duty and should not be relieved of liability (paras 118-120).

The judge then went onto consider the defendants’ argument that their liability should be limited to the shortfall in the administration, which they calculated at £350,000 (the claimant disputed this figure).

The defendants argument was that to award the claimant more would end up in a circularity since KPL was a creditor and shareholder and would ultimately receive any surplus. Clearly, in the background was the fact that Manolete would take a greater benefit dependent on the level of the sum recovered, something the defendants wanted to deny it.

The judge declined to decide whether he had the jurisdiction to limit recovery in the way sought, concluding that on the facts he would not exercise his discretion, even if he did have it because of the prejudice this would cause the claimant and to creditors where the liabilities of JRGL were not definitively known.

He held there was a public interest in not discouraging office holders from assigning claim. But the door has been left open to imposing a cap on liability in a more straightforward case.