Lexi Holdings Plc v Luqman & Ors

Under CPR Part 24.2, a defendant has no real prospect of successfully defending a claim where the proposed defence is more than merely weak but remains false, fanciful or imaginary. Probability of success is not required. The court must avoid a mini-trial, but may reject evidence that is incredible or irreconcilable with contemporaneous documents. Findings made after cross-examination in related proceedings, though not binding on other defendants, may bear strongly on the realism of their evidence. A director cannot escape fiduciary and common-law duties through complete inactivity; delegation creates a duty of supervision. A director who knowingly permits an improper practice may be liable for its continuation without knowing every individual transaction. Causation remains essential for liability based on neglect. The Duomatic principle cannot rescue transactions where the company was insolvent.

The claimant, a company in administration, sought summary judgment against three defendants arising from alleged misappropriations, unlawful loans, connected property transactions and an inflated directors’ loan account. The second defendant was alleged to be a shadow or de facto director who actively participated in the company’s affairs. The third and fourth defendants were alleged to have been directors whose inactivity caused the losses. The court considered evidence and findings from earlier committal proceedings against the first defendant, but no res judicata or issue estoppel was asserted against the defendants before the court. The central questions were whether the defences had a real prospect of success and whether the defendants’ conduct established personal liability.

1. Summary judgment test. CPR Part 24.2 requires absence of both a real prospect of successfully defending and any other compelling reason for trial. A real prospect is more than fanciful but need not be probable. The court must not conduct a mini-trial, although it may reject evidence which is incredible or contradicted by contemporaneous documents. The findings made after cross-examination in the related committal proceedings were not binding on these defendants, but were highly relevant to the realism of defences adopting the first defendant’s evidence.
2. Underlying claims. The first defendant’s defences concerning ownership of the UNB and Lloyds TSB accounts, the TFC funding arrangement, the directors’ loan account and most individual payments were fanciful. Summary judgment was therefore available for most misappropriations. The kiting payment and payments to Maidment established liability to account, but not a presently quantifiable monetary liability. Loans contrary to section 330 of the Companies Act 1985 and property transactions contrary to section 320 were established except where the evidence left a triable issue about the required connection, or failed to prove a transaction. Repayment did not answer an authorising director’s liability to account. The Duomatic defence failed because the company was insolvent, and the party invoking it had not shown solvency.
3. Waheed. As a shadow or de facto director, Waheed owed the same fiduciary duties as a de jure director. His knowledge of several misappropriations and connected transactions established knowledge of improper practices. By doing nothing to stop them, he authorised or permitted their continuation, even without knowledge of every individual transaction. He had no real prospect of relying on the statutory defences in sections 322(6), 341(5) or 727.
4. Monuza and Zaurian. Complete inactivity by a director breached fiduciary and common-law duties. However, the claimant had not shown at summary judgment that proper supervision would have revealed the misconduct or prevented it. The causation case was fact-sensitive, insufficiently pleaded and procedurally unfair to determine without trial. Monuza also had a real prospect of showing that her payment of £75,800 represented repayment of money which had reached the claimant. Summary judgment was accordingly granted against Waheed broadly as claimed, while Monuza and Zaurian were permitted to defend except as to breach of duty.