Case law update
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An insolvency case law update prepared by Charlotte May, Associate Director at Manolete Partners PLC.
Dishonest assistance and knowing receipt as additional claims against third parties
Manolete Partners Plc v Nag & Nag  EWHC 153 (Ch)
In this judgment of David Halpern QC sitting as a Deputy High Court Judge handed down on 28 January, Manolete obtained judgment against a director for breach of duty and also against his non-director wife for dishonest assistance (or alternatively would have found her liable for knowing receipt). This case provides a useful reminder of when a director can (or cannot) rely on having obtained professional advice. The case also provided a bonus of compound interest upon the liability.
Mr Nag was the sole director of a telecoms business which encountered financial difficulty at the end of 2012. In 2013, the business was sold but none of the £1.3m proceeds of sale reached its creditors.
The business was sold via another SPV company wholly owned by Mr and Mrs Nag which had no liabilities and was presumably chosen to hive off any undesirable liabilities. The company’s assets (primarily comprising customer phone numbers and a dealership contract with Vodafone) were transferred to the SPV for £650k. The purchaser paid £1.3m for the assets and Mr and Mrs Nag’s shares in the SPV. Of the proceeds, £446,746 was paid to another of Mr Nag’s companies (which he claimed were the account details for the company), £574,338 was paid directly to Mr Nag and the remainder comprised a sum owed to Vodafone (which Mr Nag had guaranteed) plus legal costs.
The director’s reliance on professional advice
The Judge found that the company’s assets had been manipulated between the various companies owned by Mr and Mrs Nag, which had no commercial justification. Mr Nag was liable for breach of fiduciary duty for the whole £1,267,430 paid by the purchaser, which ought to have been paid to the company instead of himself and his other company. No credit was given for the £203k paid to discharge the company’s liability to Vodafone as Mr Nag was not treating the creditors as a whole (the Judge was prepared to label that payment a preference, paid solely to avoid Mr Nag’s personal guarantee).
Mr Nag sought to rely on the fact that he/the company had instructed solicitors in the transaction who, he claimed, would have told him if the transaction was not proper. However, Sharp v Blank  EWHC 3096 (Ch) as cited in this case states that “the taking and acceptance of advice is not a substitute for the exercise of reasonable skill and care: it is only part of the discharge of that duty”.
The Judge in this case added, “the final sentence from that quotation applies with even greater force in a case of breach of fiduciary duty, since a director should not need a solicitor to tell him whether his actions are bona fide and likely to promote the company’s interests for the benefit of its creditors”. This is a common sense application of breach of duty where professional advice is relied upon. In particular, the solicitors had queried the destination of the payments.
The Judge went further and found the transaction to be “so obviously improper that I cannot infer that [solicitor] considered the point and decided that it was proper. The more likely explanation is that they were instructed on an execution-only basis”.
The Judge also found Mr Nag liable for further sums arising from a director’s loan account (which he failed to argue had been paid off) and for writing off an intercompany debt due to the company.
The wife and dishonest assistance or knowing receipt
Mrs Nag claimed not to have known what was happening, that she did not read any documentation and only signed because she trusted her husband. However, she was secretary and shareholder of the SPV that sold the business. Her signature as shareholder was required in order to affect the transaction.
Dishonest assistance requires:
- a breach of trust – which was established by Mr Nag’s breach of fiduciary duty (applying Re Burnden Holdings);
- that she assisted him – which was established as she was required to execute the documents; and
- that she acted dishonestly – which was established as, despite it being natural to trust a spouse, she was wilfully blind and not how an ordinary decent person would have behaved in the circumstances.
The dishonesty requirement is a high hurdle, and it is usual to also plead knowing receipt which has a lower threshold. Knowing receipt requires:
- a disposal in breach of trust – which was established by the personal payment to Mr Nag;
- beneficial receipt by Mr Nag – which was established as she had instructed the solicitors to pay her 50% share to Mr Nag and a power to direct payments constitutes sufficient receipt; and
- knowledge by Mrs Nag that it was the company’s property – which was established due to the finding of sufficient knowledge to establish dishonest assistance.
The Judge found her liable for dishonest assistance but added that she would have been liable for knowing receipt if the requirements for dishonest assistance had not been met. Had the Judge found Mrs Nag liable for knowing receipt, the liability would have been limited to the 50% sum she was entitled to, but as she was liable for dishonest assistance the judgment against her was for the whole of the proceeds of sale.
The total judgment provided liability for over £1.8m, which included interest at 4% compounded quarterly. This was a case in which the Court was minded to provide for compound interest from the date of the sale. Compound interest can be claimed where a party has received trust property in breach of fiduciary duty. Mrs Nag was liable as a non-fiduciary for compound interest due to the nature of the claims for dishonesty. This is a useful reminder that, depending upon the circumstances, compound interest can be sought from the date of a transaction, particularly where the nature of the claims include dishonesty.
Content courtesy of IPA corporate partner Manolete Partners PLC.