Singla v Hedman & Ors

A director must not commit a company to substantial liabilities where, assessed objectively, there is no reasonable prospect of avoiding insolvent liquidation. The assessment applies the standard in section 214 of the Insolvency Act 1986, having regard both to the general standard of a reasonably diligent person and to the director’s actual knowledge, skill and experience. There is no lower standard of responsibility for directors in a risky industry. A contractual document labelled a licence may amount to a partial assignment of copyright if its wording and commercial effect support that construction. Backdated documents and alleged variations unsupported by credible evidence cannot displace the rights created by the original agreement.

The liquidator of NMD (UK) Ltd brought claims arising from the production of a film. NMD’s sole director, Thomas Hedman, had entered into a production services agreement when the company had only £2 capital, no committed finance and no concluded agreement with the proposed leading actor. The film ceased production almost immediately and NMD was later wound up insolvent.

The liquidator also claimed that NMD retained copyright and related rights under a one-picture licence granted by Stonewood Communications BV, and that later documents purporting to vary or terminate those rights were ineffective. Claims were brought against Mr Hedman, Gone to Hell Ltd and Stonewood. The issues included wrongful trading, construction of the licence, the effect of alleged variations, copyright infringement and alleged transactions at an undervalue.

1. Wrongful trading. The claim against Mr Hedman under section 214 of the Insolvency Act 1986 succeeded. The relevant date was 24 March 2006, when he signed the production services agreement. NMD had no available finance, no binding commitment from Seven Arts to provide finance, and no concluded contract with the proposed principal actor. There was no reasonable prospect that NMD would avoid insolvent liquidation.
2. The statutory assessment is objective. Under section 214(4), the court considers what a reasonably diligent person with the relevant general knowledge, skill and experience would have known, as well as the director’s actual knowledge, skill and experience. A director cannot transfer the risk of an inevitably unsuccessful venture to creditors merely because the industry is commercially risky. Mr Hedman ought to have made proper enquiries and should have delayed committing NMD until finance and the principal actor were secured.
3. Construction of the OPL. Although described as a licence, the agreement’s wording granted exclusive and irrevocable rights in perpetuity and throughout the world. Its commercial effect was consistent with a partial assignment of copyright. The label was not conclusive. At the least, the agreement created a statutory exclusive licence. NMD therefore retained enforceable rights preventing another organisation from making a film using the same screenplay.
4. Stonewood had power to grant the rights. Alternatively, its conduct through Mr Waller prevented Stone & Stone from denying that authority, or the warranties in the OPL were breached. The alleged oral variation was rejected on the evidence. The backdated amendment and related documents were forged and ineffective. In any event, the alleged variation lacked consideration and was a transaction at an undervalue under section 238 of the Insolvency Act 1986; it was also capable of falling within section 423.
5. Gone to Hell’s film infringed NMD’s rights under the OPL. The claim that Gone to Hell had procured Stonewood’s breach was not made out. The court accepted that declaratory and ancillary relief should be considered, and left the precise relief and any damages against Stonewood for further submissions.

First-instance decision. The judgment itself does not state any prior appellate decision.