Stranger than fiction

Section 214 of the Insolvency Act 1986 provides that a director of an insolvent company who knew or ought to have known that there was no reasonable prospect of avoiding liquidation may be found liable to make a contribution to the assets. Wrongful trading cases are rare. This one makes no new law, but may be instructive and is certainly colourful.  I could not make it up.

The dramatis personae

• Hedman: first respondent, sole director and shareholder of NMD.
• NMD: NMD (UK) Ltd, a special purpose vehicle with £2 issued share capital formed as a film production company to make and exploit a film titled Nine Miles Down.
• OM: Oliver Martinez, intended but unconfirmed lead actor. (This is the name in the report, but it may have been Olivier Martinez, French actor and ex of Kylie Minogue.)
• GTH: Gone to Hell Ltd, second respondent. Produced a version of the film pursuant to a second one-picture licence (OPL) granted to it after the demise of NMD.
• Stonewood: third respondent, Dutch company and licensor of the right to produce the film. Not represented at trial.
• Waller: beneficial owner of Stonewood and proposed director of the NMD film.
• Peter Hoffman: Los Angeles entertainment lawyer.
• Kate Hoffman: Peter Hoffman’s daughter, owner and director of GTH and also representative of Seven Arts.
• Seven Arts: US film financing company owned or controlled by Peter Hoffman.
• OSB: One Step Beyond, the petitioner and only creditor of NMD.

The plot

NMD entered into a production services agreement (PSA) with OSB when it had no cash or agreed financing, and no binding contract with OM. Other than any claim arising out of the OPL it held, it had no assets. Hedman had left financing to be arranged by Peter Hoffman and Seven Arts, but none was forthcoming. He left negotiation of terms with OM to Waller. The PSA committed NMD to making immediate and future payments for the film production; OSB was to provide filming services in South Africa and Namibia. Production ceased on day two, in the absence of the leading actor and any funding.

OSB pursued NMD by arbitration in South Africa, obtained an award which they registered in England as a judgment and eventually petitioned for NMD’s winding up. The liquidator brought an action for wrongful trading against Hedman and sought ancillary declarations against the other respondents.

The dénouement

The wrongful trading issue was relatively easily disposed of. Mr Justice Peter Smith noted that NMD never had any more capital than the nominal £2; had no cash or enforceable agreements for the provision of finance; and signed the PSA when it had no finance or other resources to honour its obligations, and no contract with OM. He continued: “None of this might have been important if NMD had had the luxury of time and money. It had neither and OSB has lost as a result.”

Hedman “demonstrated his attitude to his responsibilities as director” in his first witness statement. Acknowledging that NMD had no assets when filming began, “he stated it was his experience that it would be very unusual for a film company to begin its activities with sufficient funds of its own to make the film… The statement demonstrates in my view Mr Hedman’s casual approach to his director’s duties to look to the best interests of NMD and if the company does not have assets to pay creditors the duty that he owes to those creditors to minimise their losses.”

Space precludes discussion of the ancillary claims. Suffice to say that the judgment contains the following passages: “I frankly disbelieve Mr Waller on this and all the key points of his evidence. I find him evasive and unconvincing. I had the same view of Mr Hedman. More seriously, Mr Hedman told a whole series of lies.” And later: “[Hedman’s] statement and the witness statement… suggests a remarkably low standard of corporate responsibility in the film industry as being normal. There is, however, in my view no special low standard for people in the film industry.”

Hoffman appears to have been a colourful character as well. The judgment calls his competence into question: “The OPL was apparently created by Peter Hoffman. It is a poorly drafted document”; and later: “…the quit claim was a forgery. Mr Hoffman will have known that. It is disappointing to see an advocate of the California State Bar being willing to tell lies”. The judge also held that Hedman and Waller were telling lies, and Kate Hoffman had fabricated documentation after NMD’s liquidation with a view to providing GTH with clear title to produce the film licensed to NMD.

Although it appears Martinez had declined to be involved because he was not offered sufficient money, it is tempting to hope that his refusal showed some foresight about the possible consequences.

• Alistair Burrow, Head of Recovery, Tods Murray LLP