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Insolvency - News and Legal Updates, March 2022

In this bulletin, we focus on the case of Manolete Partners Plc v Ronojay Nag and Amanda Nag [2022] EWHC 153 (Ch). Nazash Asif and Crispin Jones discuss the Judgment generally; Holly Ransley reflects further on that decision from the point of view spouse directors and the consequences of failing to use their own judgment; and Tara Searle considers knowing receipt and dishonest assistance in more detail. Separately, Holly Ransley provides an update on the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 along with Luke Fitton providing an update on a recent director disqualification and the Insolvency Practitioners Association reminder of due diligence obligations in relation to the new government sanctions against Russia.

Ashfords LLP instructed by Manolete Partners Plc in the decision of Manolete Partners Plc v Ronojay Nag and Amanda Nag [2022] EWHC 153 (Ch)

The principal wrongdoer and his wife were liable to account for all monies extracted from the company in liquidation, which they received via an associated entity they owned and controlled. Whilst the decision notes all the ingredients of dishonesty and calculated plan to denude the main company in liquidation and its creditors of assets, the interesting features of the decision record: (i) the basis for accessory liability of the non director wife; and (ii) the scope for relief, in circumstances which legal advice had been obtained for the impugned transaction.

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Spouse directors: the risks of saying ‘I do’

Section 172 of the Companies Act 2006 requires, among other things, that directors act in good faith and have regard to the likely consequences of decisions in the long term. Section 173 of the Companies Act 2006 requires directors to act with independent judgment. By doing nothing a director can be a breach of their duties.

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The balance between trusting and submitting – Manolete Partners PLC v Nag

As a follow on from our article on (name main article) the recent case of Manolete Partners PLC v Nag [2022] EWHC 153 (Ch) offers supplementary information in regards to claims of dishonest assistance and knowing receipt. To recap the law, dishonest assistance refers to the personal liability of a non-trustee that arises when:

  • A trust exists. For instance, directors will be regarded as trustees of the company’s assets, which in turn constitute trust property;

  • A trustee acts in breach of trust;

  • A non-trustee acts as an accessory by inducing or enabling the breach of trust;

  • The non-trustee acted dishonestly. Here, dishonesty is determined using an objective test on whether an ordinary decent member of society in the same position, and with the same knowledge, would have acted in the way the non-trustee did.

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Insolvency Practitioners Association reminder of due diligence obligations

Following the UK Government's move to introduce new sanctions against Russia, the Insolvency Practitioners Association has issued a reminder that Practitioners should check for updated sanctions and consult the Office of Financial Sanctions Implementations' ("OFSI") list of financial sanctions asset freeze targets (available here). Practitioners must contact OFSI at the earliest available opportunity where they know or suspect that:

  1. a breach of financial sanctions has occurred;
  2. they are dealing (directly or indirectly) with an individual that is subject to sanctions and/or
  3. they hold frozen assets

Failure to comply with reporting obligations or breaching Sanctions may result in a criminal prosecution or a monetary penalty. With that in mind, it's vital to consider any increased risks associated with transactions with Russia and follow the guidance issued by OFSI (available here). HMRC has also issued guidance on Customer Due Diligence and risk assessment (available here).

The Insolvency Service has new powers to investigate directors conduct

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 came in to force on 15 February 2022. The Act extends the power of the Insolvency Service to investigate and disqualify directors whose behaviour did not meet the expected standards without the requirement of the director’s company being restored. The aim is to combat three key issues: companies being dissolved for the purposes of allowing directors to avoid any investigation into their conduct; stopping directors from avoiding paying back bounce back loans by striking off the company and creating a new one without the debt; and addressing directors who seek to use the dissolution process as an alternative to a more appropriate insolvency process. It is expected that creditors will report suspected breaches to the Insovlency Service and this will be a deterrent for directors seeking to dissolve a company whilst debts remain due.

Director Disqualification

A Manchester-based director has been given a 6 month sentence (suspended for 12 months) after breaching a disqualification order that prevented him from acting as a company director.

In 2012, Nasrullah Irfan accepted a disqualification undertaking following an Insolvency Service investigation into misconduct whilst he was a director of The Loan Supermarket. The company was wound up after investigations found that Irfan and his co-directors had taken funds out of the company to (amongst other things) buy Rolex watches and lease luxury cars. The company had also been subject to numerous complaints and, upon liquidation, owed approximately £800,000 to its creditors.

In breach of his disqualification order, Irfan continued to act as a director of an online watch and jewellery retailer alongside his wife and co-director. As a result, he was disqualified for a further 7 years in 2020, whilst his wife (who had known he could not act as a company director) was disqualified for 4 years.

For more information on this bulletin, please contact our Restructuring & Insolvency team.

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