A recent High Court judgment has provided useful guidance for insolvency practitioners investigating share sales where company money has been used to fund an outgoing shareholder’s exit.
In Manolete Partners Plc v David Smith [2026] EWHC 1046 (Ch), the court considered a structure in which a new company acquired shares from an outgoing director and shareholder, but the purchase price was funded by money taken from the trading company itself. The company later entered administration. The court found that the payments were transactions at an undervalue and that the breach of duty claim also succeeded in relation to payments made while the outgoing shareholder remained a director.
For office holders, the judgment is important because these arrangements are not unusual. A departing shareholder sells their shares, a purchaser uses a newly incorporated company to acquire them, and the target company’s own funds are used to make the deal happen. Where the target company later fails, the question is whether the company received anything of real value in return.
What was the issue in Manolete v Smith?
The case concerned A & D Joinery Limited (the Company), which was sold to A&D MTE Ventures Limited (NewCo), a newly incorporated SPV with no known assets. The outgoing director and shareholder received payments totalling £748,270 in consideration for his shares in the Company. The essential issue was that the purchase price for the shares was met from the Company’s own cash, with a loan then recorded as being due from NewCo to the Company.
- The Company ceased trading shortly after the sale and administrators were appointed, who later assigned claims to Manolete Partners PLC.
- Manolete brought claims against Mr Smith including a transaction at an undervalue under section 238 of the Insolvency Act 1986 and breach of various director’s duties.
The commercial point is straightforward. If a company pays out substantial cash to fund a shareholder exit and receives only a doubtful repayment obligation from a new company with no real resources, the office holder will need to consider whether this amounted to the company’s assets having been depleted to the prejudice of creditors.
Why did the share sale structure create an insolvency claim?
The judgment is particularly useful because it focuses on substance rather than simply the documents. The fact that the arrangement was recorded as a loan from the purchaser to the company did not end the enquiry. The real question was the effect of that loan on the Company’s balance sheet.
- On the facts reported, NewCo had no liquid assets of its own, and the experts agreed that NewCo could only repay by borrowing further money, selling its shares in the company, or relying on sufficient dividends from the Company.
- The court therefore had to assess whether the Company had truly received value in exchange for the cash it had paid out.
That is often the key issue in estates of this type. The company’s accounts may show a loan as an asset at full value, but the office holder should test whether that loan was ever realistically capable of realisation. If the borrower had no independent means to repay, if the debt was interest-free, if repayment depended on future dividends from the same distressed company, or if the company had borrowed money to fund the extraction, the balance sheet may not tell the full story.
How did the court approach the transaction at an undervalue claim?
The court identified the relevant transaction as both the payment out of the Company and the automatic creation of the reciprocal right against NewCo. The court was not simply looking at a payment in isolation and instead it considered what the company received in return.
The Company had paid away £748,270. In return, it received the benefit of a repayment obligation from a purchaser which, on the court’s analysis, had no practical ability to repay.
The judgment is also a reminder that an interest-free loan can itself be vulnerable to a transaction at undervalue analysis. If a company gives up cash and receives only a right to repayment with no interest, the value of what it receives may be materially less than the value of what it has provided. That issue becomes more acute where repayment is uncertain or dependent on the future performance of the company whose funds have already been removed.
For insolvency practitioners, the practical lesson is to interrogate the accounting treatment. A recorded loan is not necessarily equivalent to cash. The recoverable value of that loan, the borrower’s resources, the repayment terms, and the commercial purpose of the arrangement all matter.
Why did reliance on legal advice not protect the outgoing director?
The breach of director duty claim also succeeded in relation to payments made while Mr Smith remained a director. The court accepted that he had relied on legal advice and had been reassured about the structure, but that did not provide a complete answer. The judge considered that the risks to the Company of using all of its cash to pay the outgoing director should have been obvious and Mr Smith understood the nature of the transaction, notwithstanding the fact that it was not his idea.
- This is an important point for directors and office holders alike.
- Professional advice may be relevant, but it does not automatically protect a director where the company’s money is used for a purpose that benefits the director or another shareholder rather than the company.
When a company is insolvent, or close to insolvency, directors must consider creditors’ interests. If a transaction extracts company cash and leaves the company unable to meet its liabilities, the fact that the paperwork was professionally drafted will not necessarily defeat a claim.
What should insolvency practitioners look for in similar estates?
This judgment gives insolvency practitioners a clear framework for reviewing estates where there has been a recent shareholder exit funded by the company.
- The first question is how the purchase price was actually funded. If the money moved from the company to the outgoing shareholder, directly or indirectly, the office holder should examine whether the company received real value in return. An aggravating feature of Manolete v Smith was that the Company had obtained Covid-related funding to finance the ‘loan’ to NewCo.
- The second question is whether the purchaser had any independent ability to repay. A newly incorporated acquisition vehicle with no cash, no trading history and no assets other than shares in the target company may not provide meaningful value, even if a loan agreement exists.
- The third question is whether the company became insolvent as a result of the transaction. This may require a close review of the company’s cash position, creditor pressure, loan arrangements, contingent liabilities and the true value of any receivable recorded in the accounts. A loan is not necessarily a ‘balance sheet neutral’ transaction.
- The fourth question is whether the company borrowed money to fund the exit. In this case the CBILS borrowing was relevant, as was the need to consider whether the use of borrowed funds breached lending terms, potentially creating an immediate liability.
- The final question is who benefited. If the practical effect was to move company money to an outgoing director or shareholder, while creditors were left unpaid, there may be claims under section 238, breach of duty principles, or misfeasance depending on the facts.
The judgment should not be read as saying that every company-funded share sale will give rise to a successful claim. Each case will turn on its own facts, including solvency, valuation, repayment prospects, commercial purpose and the duties owed by those involved. However, it does confirm that office holders should not treat a documented loan from a new purchaser as conclusive evidence that the company received full value.
For insolvency practitioners dealing with administrations or liquidations where company funds appear to have financed an outgoing shareholder’s exit, the judgment is a useful prompt to investigate the structure carefully and at an early stage.
FWJ regularly advises insolvency practitioners, directors and shareholders on claims arising from transactions at an undervalue, misfeasance, breach of duty and disputed shareholder exits. Where an estate involves a share sale funded by company money, early legal review can help identify whether there is a viable recovery claim and how best to pursue it.
