A Tangled Web: Director ties himself in knots, then loses summary judgment battle in breach of duty claim

In PK INVESTMENTS LIMITED v (1) SEBAJEEVAN SABARATNAM & Anor [2024] EWHC 2188 (Ch) PK Investments Limited (“PK”) was awarded summary judgment against Mr Sebajeevan Sabarantnam (“S”) for breaching his directors’ duties by causing Finno Medical Limited (the “Company”) loss following a series of high-risk and undocumented transactions.

The facts

S was a director of the Company which imported medicines from the EU to be resold to wholesalers in the UK. By December 2018 the Company had significant debt and an order was made for its winding up. In 2021, the Company’s liquidator assigned all claims vested in the Company to PK, which was a substantial creditor of the Company having been owed some €1.8 million. PK brought a claim against S (and his co-director) for breaches of directors’ duties under sections 172 Companies Act 2006 (the “Act”) (duty to promote the success of the company) and 174 (duty to exercise reasonable care, skill and diligence).

PK alleged that by 31 January 2017, the Company was insolvent or bordering insolvency and therefore its directors should have had regard to the interests of the Company’s creditors when making decisions. Despite impending insolvency, S caused the Company to make a number of “high-risk investment decisions” through payments to various overseas entities, which ultimately caused significant losses to the Company.

S did not contest that the Company was insolvent or bordering insolvency in January 2017 and in an interview with the liquidator, he admitted that the Company had been trading at a loss since then. This included making advance payments of over £790,000 to two companies in Hong Kong for the supply of medical devices (“the Transactions”). S further contended that the Company’s customers (to whom the devices were sent directly) then paid the Hong Kong suppliers for the devices instead of the Company, which neither received the devices nor any payment from customers, despite having made the advance payments. S did not provide any other details of the Transactions such as the number of units allegedly purchased or the end customers to whom the units were supplied. Despite this, S claimed that he had acted in the best interests of the Company in entering into the Transactions.

The liquidator had searched all devices and servers that had been provided by S, but was unable to find any documents relating to the Transactions; there were no written contracts, invoices, or evidence of negotiations between the Company and the Hong Kong companies.

S was subsequently interviewed by the liquidator on several occasions, and asked to produce documents. The situation did not improve. S said the documents were either on the servers provided to the liquidator (which they were not), were contained on other servers or devices which had since been lost (though no evidence supporting these assertions were produced) or that he would provide the evidence later (which he did not).

Summary judgment application

PK applied for summary judgment to be entered against S on the basis of his defence having no prospect of succeeding at trial, which was resisted by S. One of the grounds for resisting was that the liquidator was in possession of all of the evidence, which was not then available to S, but would be available at trial (and further, that the liquidator had found no evidence of breach of duty).

The key issue the court had to address was the lack of documentation supporting S’s case that the Transactions were in the Company’s best interests. Nothing had been found on the servers provided to the liquidators, nor had S provided anything when they told him they could not find any documents, contrary to what the court would have expected. S also failed to provide any documentation to support his assertions that additional servers containing documents had been lost.

Decision

S had known for some time that he needed to find evidence to support his position, having been asked by the liquidators several years prior, but had still failed to do so. It was incumbent on him to put forward sufficient evidence to satisfy the court that the evidence he said existed did in fact exist, and that it would give his defence a real prospect of succeeding at trial. S had failed to do so.

Further, the Court noted that, following Wetton v Ahmed, if the matter was allowed to proceed to trial, it would have drawn adverse inferences against S due to the lack of supporting documentation. S could not simply assert that there were documents supporting his case if he could not produce those very documents, or at least some evidence as to why he could not produce them.

The court was satisfied that there was no prima facie case that he would succeed nor was there any other compelling reason for there to be a trial. Consequently, the court awarded summary judgment for PK against S for breaching his directors’ duties to the Company and causing its loss. S was ordered to compensate PK for the losses he caused the Company to make.

Comment

It is rare that a case concerning an allegation of breach of directors’ duties will be suitable for summary judgment, given the high fact sensitive and contestable nature of such allegations. The facts of this case were perhaps far too clear cut however to expect any other outcome. S had tied himself in knots during his interview with the liquidator. When it came to the crunch in the summary judgment application, S could not evidence any of his prior assertions, nor could he explain why he had failed to produce documents when challenged by the liquidator as to their existence and whereabouts. The judge was left with no doubt that the case was suitable for summary judgment.

However, the majority of cases are far less clear-cut than this. The whereabouts of specific company records may be difficult to ascertain, especially following insolvency. This judgment serves as a useful reminder for directors of the importance of diligently keeping company records, particularly at a time when the company is insolvent or bordering on insolvent. The judge noted in particular:

“The lack of books and records to support a defendant director’s case is not just an issue on an application for summary judgment. Owing to the nature of the proceedings a defendant director without books and records to support his case but who says they will be available at trial must demonstrate to the satisfaction of the court that (i) the books and records exist; (ii) that they are readily accessible and (iii) the books and records are relevant to the issues.”

Furthermore, if the company is wound up, liquidators will expect to see documents explaining why transactions were made and how they benefited the company. The consequences for failing to do so can, like in this case, result in significant awards being made against directors personally who cause loss to the company.

Further information

If you need advice concerning the director’s duties, company insolvency or company litigation, please contact Richard Clayman or Fiona Simpson.

About the authors

Richard Clayman joined the Dispute Resolution team in 2019, having previously worked at two leading civil fraud boutiques in the City. His experience covers a broad range of commercial disputes, with a particular focus on civil fraud cases, and disputes involving shareholders, directors and partnerships. 

Filton Pavier is an Associate in the Dispute Resolution team at Kingsley Napley, having completed his training contract at the firm. His experience spans a range of complex matters, including civil fraud claims, contractual, company, boardroom and shareholder disputes, and professional negligence claims.