Case law update

IPA Insolvency Practitioner newsletter, December 2024

Prepared by Andrew Murphy, Associate Director at Manolete Partners PLC.

Andrew joined Manolete in 2023 and is based in the Thames Valley. Andrew qualified as a solicitor in 2012, specialises in insolvency and restructuring, and was previously Head of Insolvency at JCP Solicitors in South Wales before moving to an offshore insolvency and trusts litigation role at Appleby’s Guernsey office. After returning to the UK, Andrew worked in Blake Morgan’s insolvency team, from which he joined Manolete.

Ranked in the 2018 edition of the Legal 500 as a “Leading Individual” for restructuring and insolvency, Andrew enjoyed a varied portfolio of contentious and non-contentious insolvency work in private practice, predominantly acting for insolvency office holders and high street lenders. Andrew is an accredited mediator, an associate member of R3, and regularly delivers presentations on contentious insolvency matters.

Unexplained Payment Claims following Re Finno Medical Ltd (in Liquidation)

With his judgment in PK Investments Ltd v Sabaratnam & Anor (Re Finno Medical Ltd – in liquidation) [2024] EWHC 2188, Chief ICC Judge Briggs adds constructively to the line of case law on claims arising from unexplained payments made prior to a company’s entry into a formal insolvency process. Let’s called these “Unexplained Payment Claims”.

Earlier Guidance

Re Finno Medical Ltd follows helpful guidance from earlier authorities on this topic. The two below are particularly relevant in this context:

• Re Idessa (UK) Ltd [2011] EWHC 804 (Ch) at [28] – the evidential burden is on the directors once the existence of an unexplained transaction is proved; and
• Re Mumtaz Properties Ltd [2011] EWCA Civ 610 at [17] – directors who have conducted the company’s affairs informally are not judged by a lower standard than more diligent directors, nor can they rely on the absence of company records (resulting from that informality) to dispute liability for claims against them

Based on these alone, insolvency officeholders could adopt the following as a very general strategy to investigating and pursuing Unexplained Payment Claims:

• Once an officeholder has established that a transaction has taken place and cannot trace a proper explanation for it in the company’s books and records or any other reasonable lines of enquiry, directors can fairly be required to explain those transactions and provide evidence that they were for proper company purposes;
• Having reviewed all books and records delivered up by that point, the officeholder should, when calling for explanations of the transactions, ask for any further documents to be delivered up in support of those explanations; and
• When calling for those documents, directors can be warned that their absence due to a history of managing the company’s affairs informally will not absolve them of responsibility.

Whilst placing the evidential burden on the directors in the manner described in Re Idessa might seem draconian, the rationale comes from the fiduciary obligations of directors as the custodians of a company’s property.

Directors can also take comfort from paragraph [28] of Re Idessa at which Lesley Anderson KC, sitting as a Deputy High Court Judge, was satisfied that the absence of an explanation for a company transaction won’t automatically render a director liable, where other evidence is available to prove that the transaction was made for proper company purposes. That further justifies the evidential burden on directors in Unexplained Payment Claims given that it impliedly requires an office holder to have conducted a reasonable and proportionate review of the company’s books and records to seek out plausible explanations, before categorising a payment as unexplained and calling for the director to justify it.

Re Finno Medical Ltd: In brief

Chief ICC Judge Briggs granted summary judgment to an assignee claimant, against the director of a company. The assignee claimant was a loan creditor of the company and took its assignment of claims from the company’s liquidator.

The substantive claim alleged that the director had acted in breach of duty by causing the company to make various payments at a time when it was insolvent or bordering on insolvency, including payments to a connected entity and substantial payments to two companies incorporated in Hong Kong. Prior to the assignment, the director attended two interviews with the liquidator to explain the payments. The liquidator also offered the director access to all company computers in her possession to assist him in locating evidence that the payments were made for proper company purposes.

The director asserted that evidence supporting his defence was contained on two servers and a computer. The computer had been lost on a trip to Paris and one server had allegedly been taken by him to a repair shop, but never materialised. The liquidator held the other server but her searches revealed that there was nothing on it to support the defence.

The director could not supply any additional documents and accepted that the liquidator held everything that would constitute his supporting documentary evidence. Chief ICC Judge Briggs therefore concluded that the director had not produced evidence to justify the impugned payments, and that he would not be able to produce that evidence in future. He went on to grant summary judgment on the basis that the director had no real prospect of successfully defending the claim at trial and that there was no other reason why the claim should proceed to trial.

Why is Re Finno Medical Ltd useful?

Re Finno Medical Ltd is helpful to insolvency litigators for two reasons in particular:

• Firstly, it reiterates the possibility of obtaining summary judgment on breach of duty claims brought by assignees, and possibly insolvency office-holders depending on the form of the proceedings; and
• Secondly, it hints at a useful strategy for disclosure and inspection of evidence in breach of duty proceedings, both generally and for the purposes of maximising the prospects of obtaining summary judgment on suitable cases.

Of relevance to the second point is Chief ICC Judge Briggs’ clarification at [34] that

“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.”

Having accepted that all available records had been supplied to the liquidator, the director in Re Finno Medical Ltd was unable to assert that further evidence might become available before the trial of the claim brought by the assignee claimant. The potential for evidence to come to light before trial is a factor in determining whether to grant summary judgment (as referred to by Chief ICC Judge Briggs at [23] and [25]).

Potential strategic application

With that in mind, the claimant to an Unexplained Payment Claim should consider keeping an up-to-date inventory of documentary evidence obtained from all sources and, at appropriate junctures, consider what other categories of documents might exist to support or disprove the assertions made in defence of a claim. For the same reasons, the claimant should consider asking the director or the company’s advisors whether any other documents exist within categorises relevant to the issues in dispute.

This should enable the claimant and their legal team to consider whether an application for summary judgment is viable at the earliest possible opportunity, potentially determining the proceedings early and at a significantly reduced cost compared to a contested trial.

Even if summary judgment is not advisable in the specific circumstances, a potential claimant could be in a far stronger position to call for adverse inferences to be made against a director at trial if they have adopted a similar process, including offering the director inspection of all available records as happened in Re Finno Medical Ltd. Doing so could significantly narrow the scope of a director’s available defence if, notwithstanding the evidential diligence and cooperation on the part of the claimant, that director is still unable to support their defence with documentary evidence.

Whilst this approach won’t fit neatly into every Unexplained Payment Claim, there is much to be said for a straightforward strategy of (i) taking stock of evidence collated to date, (ii) considering what evidence might be available from common sources and (iii) calling for a party intending to rely on that evidence at trial to prove that it actually exists.

Content courtesy of IPA corporate partner Manolete Partners PLC.

Manolete Partners PLC is an investment business focused on dispute finance. It is not a law firm and does not provide legal advice.

Please note that guest content does not necessarily represent the views of the IPA.