Singla v Hedman & Ors

On a summary judgment application under Insolvency Act 1986, s 214, the court must decide whether the director has a realistic prospect of defending the claim, without conducting a mini-trial. A court may analyse witness evidence and contemporaneous documents, but should hesitate to determine the claim finally where a fuller investigation could add to or alter the evidence and affect the outcome. For wrongful trading, the relevant question is whether, at the identified date, the director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. The assessment applies the standard of a reasonably diligent person, acting on a realistic factual basis and without unwarranted optimism. Where material issues concerning finance, commercial viability and the director’s state of mind remain unresolved, summary judgment should be refused.

The applicant, the liquidator of Nine Miles Down UK Limited, applied for summary judgment against its former director, Thomas Hedman, under s 214 of the Insolvency Act 1986. The company had entered into a production-services agreement while relying on anticipated finance for a film project. The applicant contended that, by 24 March 2006, Mr Hedman knew or ought to have concluded that the company had no reasonable prospect of avoiding insolvent liquidation.

Mr Hedman disputed that conclusion. He relied on his understanding that Seven Arts would finance the project and that the lead actor would attend, although neither the finance nor the actor’s engagement was secured by a concluded contract. The central issue was whether the evidence permitted the court to determine the statutory knowledge or constructive-knowledge question summarily.

1. The application for summary judgment was dismissed. The court was required to assess whether Mr Hedman had a realistic, rather than fanciful, prospect of success. A realistic case carries some degree of conviction and is more than merely arguable. The court was not to conduct a mini-trial, although it could scrutinise assertions in witness statements, particularly where contradicted by contemporaneous documents, and could consider evidence reasonably expected to be available at trial.

2. Under s 214(2)(b) of the Insolvency Act 1986, the relevant question was whether, on 24 March 2006, Mr Hedman knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation. The objective standard in s 214(4) required consideration of what a reasonably diligent person with the specified general and individual knowledge, skill and experience would have known or concluded. A director is expected to obtain adequate accounting information to monitor the company’s solvency. The conclusion must be reached without unwarranted optimism and on a realistic factual basis.

3. The evidence raised genuine issues requiring fuller investigation. It was accepted for present purposes that the company lacked its own funds, had no legally enforceable financing commitment and had not signed the proposed lead actor. Nevertheless, the evidence about the film industry, Seven Arts’ conduct and intentions, the proposed tax-related finance, the actor’s position and Mr Hedman’s understanding of those matters was capable of supporting his account. The contemporaneous communications did not justify rejecting his evidence summarily.

4. The court could not determine precisely what had occurred during the critical period or the participants’ states of mind. There were reasonable grounds to suppose that a fuller investigation could add to or alter the evidence available at trial and affect the outcome. Mr Hedman therefore had a realistic prospect of success.

5. The court did not finally determine the alternative submission concerning whether the company had gone into insolvent liquidation. Section 214 requires that question to be determined at the date of liquidation, when no film had been made and the value of the licence was doubtful. The point did not need to be decided because the summary judgment application failed.