Factor’s Claim for summary judgment based on fraud fails

There are a few very few cases in the law reports dealing specifically with factoring or invoice discounting, so we always pay particular attention to those that are reported, and in this respect it is worth reflecting upon the recent decision of the High Court in Elevar Finance SPV Photon LLC v Mr Sabesan Somasundaram [2023] EWHC 151(Ch).

Over the many years that we have taught anti-fraud courses for the invoice finance industry we always take pains to stress that notwithstanding the principles of corporate identity, civil claims for wrongdoing can often be brought against individuals who are caught up in the misfeasance of corporate clients. When fraud or other serious wrongdoing can be established against the client, it is rare for the corporate client to be in a state that is worth suing, but the individuals behind the corporate veil may well be worth pursuing.

This is the case whether or not the individuals have executed an enforceable guarantee, on the principle that even when acting on behalf of a corporate client an individual remains personally liable for any civil wrongs which they commit.

The example we normally give is that if you are crossing the road and knocked over by a negligent bus driver, then although in practice you would sue the bus company, which will have liability insurance sufficient to meet any claim, as a matter of law you would also have a separate claim against the individual bus driver, although in practice because you would achieve full compensation from the bus company’s insurance company there would be no point in bringing a separate claim against the driver.

Over the years we have used this principle to secure substantial sums against numerous individuals who have been involved in directing financial misconduct by clients against invoice financiers, but there is always a need for caution and a careful analysis of the factual and legal issues involved.

In the Elevar Finance case the factor was a US corporation which had lost the sum of $582,688.74 apparently because the defendant, the sole director and beneficial owner of its corporate client, had misled it by concealing a set off agreement it had with its sole customer.

The concealment arose in a number of ways:

• Prior to take on the client had completed Elevar’s Telecom Factoring Questionnaire, and in reply to the question “Do you have any other netting relationship with this Obligor?”, the Defendant replied “No”;
• on behalf of the client the defendant had signed the Factoring Deed which provided inter-alia:

“Set-off: Each Sales Asset offered for sale to, and purchased by, the Factor under the terms of this Deed is…an identifiable, unconditional, irrevocable and non-refundable payment obligation by the Approved Carrier or by the obligor of the Related Rights on its Due Date, without any right of set-off or other right,…which may operate to reduce the amount payable”; and

• Before continuing funding Elevar had expressly challenged the defendant about the possible existence of a set-off arrangement with the customer, and this had repeatedly been denied in phone calls and text messages.

As a result the factor issued proceedings against the defendant “in your personal capacity as sole director and beneficial owner of the Company and signatory to the [Factoring] Agreement for, without limitation, fraudulent misrepresentation, procuring the Company to breach the Agreement and/or unlawful means conspiracy”.

In the event the defendant managed to persuade the judge on a summary judgment application that there was sufficient material relating to the dealings between the client and the customer that needed to be examined further, so the factor’s application for judgment did not succeed and the matter will now have to be determined at a fully argued trial.

Comment

This case is a worthwhile reminder that an individual who directs or is intimately involved in the wrongdoing of a corporate client may him or herself be personally liable for civil wrongdoing, which can result in a substantial award of damages long after the prospect of recovering any worthwhile assets from the corporate client itself has disappeared.

Summary judgment is a useful device which can lead to a quick recovery and avoid the delay and substantial costs involved in a fully contested trial, but the threshold for persuading a judge that there is no need for a full trial where the case essentially relies on allegations of fraud remains high and was not met in this particular case.

Contact our Invoice Finance team.