UBS Switzerland AG v Anil Kumar

A company director must exercise powers only for their conferred purposes. The proper-purpose inquiry is subjective and requires examination of the director’s actual reasons. A director must also act in good faith in the company’s interests, with the interests of creditors becoming relevant when insolvency is imminent or practically certain. Transactions benefiting a director’s associates require a satisfactory explanation once the payment or benefit is proved. A credit note cancelling a company asset should have a good commercial reason. Where a director cannot establish that reason, the court may find breach of duty. Equitable compensation ordinarily reflects the value of assets lost through the breach or the increase in the company’s liabilities caused by it.

The claimant, an assignee of causes of action belonging to Vincom Commodities Limited, sued the defendant, Vincom’s sole director. The claim concerned eight credit notes issued in favour of a company controlled by the defendant’s brother and three payments to another related company shortly after service of a winding-up petition. The claimant alleged breaches of directors’ duties, fiduciary duty and duties owed in the interests of creditors. The defendant maintained that the transactions were genuine aspects of Vincom’s commodity-trading business and that the credit notes reflected defective or rejected cargo. The principal issues were whether the transactions were genuine, whether the defendant acted for proper purposes and in good faith, whether creditor interests had become engaged, and the appropriate compensation.

1. Liability. The claim succeeded. The defendant was ordered to pay equitable compensation of $13,337,313, with interest to be addressed at a consequentials hearing.
2. Under Companies Act 2006, s 171(b), the proper-purpose obligation required examination of the circumstances and the defendant’s actual reasons. The court found that the eight credit notes were created in late December 2017 or January 2018, not shortly after shipment, and that no material cargo damage justified them. Their purpose was to assist DMT, a company controlled by the defendant’s brother, and to prefer DMT over Vincom. This breached s 171(b), s 172 and fiduciary duty.
3. A director’s duty under s 172 is subjective, but creditor interests may form part of the company’s interests when required by law. By mid-November 2017, Vincom’s insolvency was practically certain and the defendant was bound to have regard to creditors as a whole.
4. The first two AST payments, totalling $4,614,662, were fabricated transactions intended to put Vincom’s assets beyond creditors’ reach. They were fraudulent and breached the proper-purpose obligation. The third payment was not found fraudulent, but it increased Vincom’s Credit Suisse indebtedness by about $1 million for a negligible and highly uncertain benefit involving an already substantially indebted customer. It therefore breached s 172(3).
5. Compensation for the credit notes was the full value of the cancelled invoices, $7,769,071. Compensation for the first two AST payments was the value of the assets paid away, $4,614,662. Compensation for the third payment was the resulting increase in Vincom’s debt, $953,580.