E-Clear (UK) Plc v Elia & Ors

On a summary-judgment application, a court must not resolve genuinely disputed evidence or factual issues requiring cross-examination. A company’s balance-sheet insolvency does not, by itself, prevent it from continuing to trade; whether it could meet liabilities as they fell due, and whether a director knew or ought to have known of the position, may require a trial. Payment of a company debt may constitute a breach of fiduciary duty, including where payment is made to a director, but breach does not automatically establish a proprietary tracing remedy. The availability of such a remedy where company money has discharged a pre-existing liability depends on the general tracing rules and the facts found at trial.

E-Clear (UK) plc’s administrators brought Chancery Division proceedings concerning payments allegedly made by Elias Elia, a director, from company funds. The company claimed a beneficial interest in 35.5% of a flat purchased using those payments. Mr Elia’s trustee in bankruptcy consented to an order declaring the company beneficially entitled, but Mrs Mili Petrou Elia, who claimed an equitable interest under a later assignment, contested the company’s claim.

His Honour Judge Mackie QC, sitting as a Deputy Judge of the Chancery Division, granted summary judgment under CPR Part 24 on 25 April 2012. Mrs Elia appealed, contending that there were realistic prospects of showing that the payments discharged pre-existing debts and that no breach of fiduciary duty, or proprietary remedy, arose.

1. Appeal allowed. The summary judgment against Mrs Elia was set aside. Her equitable title was acquired before the consent order, and the trustee’s admission of the company’s claim was not binding on her. She was entitled to a judicial determination based on the evidence.
2. There was a seriously triable issue whether the company was indebted to Mr Elia in the alleged sums. The evidence concerning loans, including the €5m advance and the €1.9m payment connected with NF Bank, could not properly be resolved on a Part 24 application.
3. Whether repayment of debts in February and March 2009 breached fiduciary duty was linked to the company’s solvency and Mr Elia’s knowledge of its financial position. Repayment would be unobjectionable absent actual or imminent insolvency. Balance-sheet insolvency was strong evidence, but it did not prevent continued trading where liabilities could be met as they fell due. The company’s survival for another year could support an inference that it had financial support and that an optimistic view of its prospects might have been held reasonably. These matters required trial.
4. The court confirmed that debts due to Mr Elia could not be set off against liability for breach of fiduciary duty. It also accepted that payment of company debts could amount to breach, including payment to a director, and that this was not negated merely because a debt was discharged. The preference issue was left for another day.
5. The court did not decide whether such a breach supported a proprietary tracing claim where company money had discharged a pre-existing liability. That difficult, fact-sensitive issue was better addressed after findings of fact.

The parties were invited to agree directions for a speedy Chancery Division hearing.

• Court of Appeal (Civil Division): [2013] EWCA Civ 1114 — allowed Mrs Elia’s appeal and set aside the summary judgment.
• High Court of Justice, Chancery Division: order dated 25 April 2012 by His Honour Judge Mackie QC, sitting as a Deputy Judge, granting summary judgment under CPR Part 24 and declaring the company beneficially entitled to 35.5% of the flat.