Charlotte May, Associate Director at Manolete partners, summarises how recent judgements can usefully be applied when pursuing recoveries for insolvent estates.
At Manolete Partners Plc, we see a high volume of claims arising from unexplained or poorly documented payments – often described as director’s loans, dividends, transactions at an undervalue, or simply “drawings”.
While the legal principles are well established, the practical challenge is how to apply them efficiently and commercially. The cases below are ones we regularly rely on in practice to recover assets from insolvent estates.
Case one: BM Electrical Solutions Ltd
The liquidator pursued the director who was also a shareholder for unaccounted payments, most of which were direct bank transfers to the director. The liquidator said the payments should be treated as a director’s loan or were made in breach of duty. Importantly, none of the payments were pursued as unlawful dividends even though labelled as ‘drawings’ on the nominal ledgers.
The director claimed the payments were either remuneration or dividends, arguing he had considered overall profitability on the firm’s accounting software before paying himself, though no dividends were formally declared.
The Judge found:
- For a dividend to become payable it must be declared. Once it is declared it becomes a debt due by the company to the member. However, unless formally declared there is no liability on the company to pay it.
- Without a declaration, payments cannot later be treated as dividends.
- If there was no distribution, the money paid to must have been paid as a loan and so must have been repayable to the company.
Therefore, even if the funds were available, failure to formally declare the payments as a dividend meant they could not be treated as such and fell as a director’s loan.
How the case was applied – interim dividends
Interim dividend payments were allocated to an intercompany loan account as the director employed himself via another company, reducing the total owed by the connected company. The company’s last accounts showed some reserves, though there was a loss of customers and growing amounts owed to creditors. Moreover, the dividends had never been declared.
We therefore pursued the payments as a loan and alternatively as unlawful dividends. As the primary claim was for a debt, this limited the arguments about the onset of insolvency and reserves. As a result, the claim was settled quickly.
Case two: Fastfit Station
How can an office holder pursue payments first diverted to a third party and then used to pay creditors? A preference claim only operates against the recipient of the company’s funds.
The company in this case was insolvent and wanted advice about entering a CVA and pre-pack sale to a newco. The directors were concerned that the company bank account would be frozen upon administration.
When the notice of intention was filed, the directors immediately installed new electronic payment terminals and began to use a new bank account for the newco to deposit customer funds. Some £110k of income generated by the company was paid directly to the newco in the two weeks prior to the appointment of administrators [this was in 2014 so before concerns about consequential notices of intention arose].
The directors claimed that the newco used most of the funds to pay the company’s creditors. A preference claim was not available because the payments were not made by the insolvent company. The liquidators pursued the payments as transactions at an undervalue instead.
The Court found that funds diverted at source could still amount to a transaction by the company as the payments were due to the company as creditor of the customers and the funds were diverted at its direction.
The Judge said:
”… it cannot be correct that the insolvency regime can be subverted by monies being paid to a third party, which then has a free hand as to which creditors of the insolvent company are then paid.”
Payments to the newco were therefore gratuitous and repayment of the full £110k was ordered. It did not matter that some of the funds had been used to pay legitimate creditors.
How the case was applied – council contract
The liquidator in this case noticed that a newco had been set up and the company’s income suddenly stopped. The directors claimed that the company’s only customer, the local council, had terminated the contract but enquiries confirmed that the contract had not been terminated and instead the council had been given different payment details (for the newco).
We analysed the company’s various bank accounts, which revealed that about £600k had been diverted to the newco prior to CVL. The directors argued the newco was free to contract afresh with the council. However, we pursued the claim for transactions at an undervalue (plus directors’ loans) and settled prior to proceedings being issued.
Case three: Finno Medical Limited
This case further confirms that a summary judgment might not be defeated by disclosure arguments.
Following Re Idessa, once an office holder identifies a transaction that cannot be explained by the books and records, the burden falls on the directors to provide an explanation
The liquidators identified unexplained payments to the director of a pharmaceutical wholesaler, connected companies and companies abroad. No satisfactory answer was given, and the liquidators assigned the claims to a creditor who applied for summary judgment.
The director claimed that the records were on a server and a computer, which had since been lost, and which he could rely on at trial so summary judgment should not be made. Having accepted that all available records had been supplied to the liquidator, the director was unable to claim that further evidence might become available before the trial.
The judgment found that a defendant director without books and records to support their case but who says they will be available at trial must demonstrate to the satisfaction of the court that: the books and records exist, they are readily accessible and are relevant to the issues.
How the case was applied – financial services company in special administration
In a recent unreported case, we pursued the directors of a financial services company in special administration. The company’s key asset was expenditure on an AI investment model that never became operational. We settled with one director but the other refused to engage with us or file a defence resulting in an unless order.
When a defence was later provided, the director said the evidence was in the books and records which he could not access. However, he did not say what records existed, and the administrators, who offered access to the records, could not see anything to support the transactions. We obtained judgment plus penalty interest and costs and are now enforcing a charging order against the director’s property.
Access to company records – Contract Natural Gas (Marketing) Limited
Another recent judgement considered access to company servers, particularly where they are large and expensive to maintain. Although the claim was by a creditor following the administrator’s refusal to accept a proof of debt, it provides useful guidance for office-holders dealing with electronic records.
Case references
Re BM Electrical Solutions Ltd [2020] EWHC 2749 (Ch)
Re Fastfit Station [2023] EWHC 496 (Ch)
Re Finno Medical Limited [2024] EWHC 2188 (Ch)
Contract Natural Gas (Marketing) Limited v the Joint Liquidators of Contract Natural Gas Limited [2026] EWHC 707 (Ch).
