Manolete Partners Plc v Howarth: When Insolvency Claims Don't Succeed – Preferences and Transactions at an Undervalue

One Legal Services Limited (the Company) was a legal aid practice operating as an alternative business structure (ABS).  The Company experienced severe financial distress from 2018 due to accumulated Crown debts, historic liabilities inherited from a prior acquisition, and chronic cash flow shortages. 

The Company’s CEO and director, Trevor Howarth, had earlier advanced a £75,000 loan to the Company.  Contractual interest was payable on the loan, so by early 2019 the amount payable by the Company to Mr Howarth stood at £97,445, plus further interest.

In August 2018, Mr Howarth sought specialist insolvency advice from Robert Adamson of Armstrong Watson and a Company Voluntary Arrangement (CVA) was suggested. 

The CVA was approved (with HMRC-imposed modifications) on 22 February 2019. 

Crucially, the CVA recorded Mr Howarth’s director’s loan as excluded – meaning that it was unaffected by the CVA and outside the CVA fund. 

Immediately after the approval of the CVA, Mr Adamson advised Mr Howarth to come off payroll to reduce PAYE/NIC liabilities and instead receive monthly director’s loan repayments equivalent to his net salary. 

Between April and December 2019, the Company paid Mr Howarth £101,000.  This was openly recorded in management accounts and visible to Armstrong Watson during their routine monitoring of the CVA.

The CVA failed, and the Company entered administration on 3 January 2020. 

After the death of Mr Adamson, Manolete were assigned the claim by the administrators and brought proceedings alleging that the payments of £101,000 to Mr Howarth constituted preferences and transactions at an undervalue pursuant to sections 239 and 238 of the Insolvency Act 1986 (the Act). 

Whilst the court’s decision in this case was a major win for the director involved, it does provide helpful guidance for both office-holders and litigation funders who bring these types of claim. 

The case highlights the importance of contemporaneous documentation. 

The court was critical of the failure to preserve and disclose meeting notes, emails and working papers and said that missing documentation may justify the drawing of adverse inferences.  It is therefore vital that insolvency practitioners maintain records of advice given and decisions made. 

The court’s decision also confirms that directors may legitimately rely on the advice of insolvency professionals. 

Where a director acts transparently and honestly and in accordance with guidance from an office-holder (such as a CVA supervisor) they are less vulnerable to allegations later regarding preferences and transactions at an undervalue. 

This results in shifting the evidential burden back to the applicant to demonstrate wrongdoing with proper proof.  The court’s judgment also clarified that salary-for-loan swap arrangements may be valid and commercially justified when designed to reduce PAYE/NIC liabilities, particularly when they replace salary. 

The court also confirmed that those bringing claims must ensure that claims are properly investigated, factually sound and supported by documents before court proceedings are commenced.