s.214 IA86 considered - Singla v Hedman & Ors  EWHC 902 (Ch) (28 April 2010)
Mr Justice Peter Smith has handed down his judgment in Singla v Hedman & Ors  EWHC 902 (Ch) (28 April 2010). The case concerns some rather dubious activity which culminated in accusations of wrongful trading. As the learned judge notes:
"The requirements of section 214 IA 1986 are as follows:-"(1) subject to subsection (3) below, if in the course of the winding up of a company it appears that subsection (2) of this section applies in relation to a person who is or has been a director of the company, the court, on an application of the liquidator, may declare that person is to be liable to make such contribution (if any) to the Company's assets as the court thinks proper.
(2) this subsection applies in relation to a person if :-
- the Company has gone into insolvent liquidation
- at some time before the commencement of the winding up of the Company that person knew or ought to have concluded that there was no reasonable prospect that the Company would avoid going into insolvent liquidation, and
- that person was a director of the Company at that time."
93. Sub paragraphs (a) and (c) of subsection 2 are made out.
94. I should also refer to subsection (4) which provides:-
"for the purposes of subsections (2) and (3), the facts which a director of a company ought to have known or ascertained, the conclusions which he ought to reach and the steps he ought to take are those which will be known or ascertained or reached or taken by a reasonably diligent person having both:-
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the Company, and
- the general knowledge, skill and experience that that director has."
95. It is therefore for the court to judge objectively whether there was as at 24th March 2006 (being the relevant date in this action) no reasonable prospect that NMD would avoid going into insolvent liquidation and then to conclude objectively whether Mr Hedman ought on 24th March 2006 to have concluded that was the case.
96. It is not suggested that Mr Hedman knew that NMD would go into insolvent liquidation on that date. The submissions of the Liquidator are that he ought to have known that having regard to the facts in relation to the signing of the PSA on that date. Mr Hedman's liability is measured by his knowledge and experience as set out in subsection (4).
97. Interestingly Mr Hedman in his second witness statement dated 24th July 2009 made some observations about the risks in the film industry (paragraph 13) where he said:-"It is true that the film industry is a risky one, and that film companies do fail. It is inevitable, if a film does not recoup its costs, that some creditors at least will be left with money owed to them. I was a director of NMD not the guarantor of its debts, and I did not agree to assume the risks of the Company failing. I do not agree that I improperly attempted to push any risk on to creditors, or that I have acted unreasonably in not personally paying NMD's debts if that is what is suggested. I have not personally taken any money out of the Company for my work on the film".
100. ....There was no evidence in my view to show there was any reasonable prospect that Mr Martinez was going to turn up and there was no reasonable evidence to show as at 24th March 2006 that any funding would be forthcoming from Seven Arts. The further other difficulties highlighted above demonstrated in my view that there was no real prospect looked at objectively that the film would ever be completed. Thus the PSA was signed by NMD when it had no means of honouring its obligations and no prospect of honouring them. It of course would not lose because all it had was £2 in assets. The loss and the bearing of the loss was born by OSB and the losses and claims it sustained arising out of NMD's failed obligations under the PSA. It was inevitable that NMD would not fulfil its obligations and would not therefore be able to avoid going into insolvent liquidation and that was the position at 24th March 2006.
101. Looked at objectively in my view the PSA should not have been signed. The only purpose for signing was to kickstart the filming in the forlorn hope of obtaining DCMS funding. I have already referred to the difficulties about that funding above. This was done in spite of the situation at the time."
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