Outer House awards Phlo Technologies £1.76m after director breached fiduciary duties

About this case:

• Citation:
  [2026] CSOH 107
• Judgment:
  External link
• Court:
  Court of Session Outer House
• Judge:
  Lord Richardson

Lord Richardson held that Nadeem Sarwar acted for an improper purpose and not in good faith when he caused Phlo Technologies Ltd to make 26 payments to Universal Pharmacy Ltd through a Tide bank account. The court found that Mr Sarwar concealed the account from Phlo’s financial management and falsified a bank statement showing funds which were not in fact there.

Dean of Faculty Roddy Dunlop KC and Elisabeth Roxburghe KC, instructed by Addleshaw Goddard LLP, appeared for Phlo Technologies. Bowen KC, instructed by BTO Solicitors LLP, appeared for Mr Sarwar. The action forms part of a wider dispute concerning control and leadership of Phlo, an online pharmacy business. Mr Sarwar founded the company and was its chief executive until August 2024. Separate litigation concerns whether he ceased to be a director at that point.

The present case concerned payments instructed between August 2022 and March 2023. Some £1.738m was moved from Phlo’s Royal Bank of Scotland account to a Tide account, before payments totalling £1,756,998 were made from the Tide account to Universal Pharmacy Ltd, or UPL. Mr Sarwar had been a director and shareholder of UPL since 2015. He accepted instructing the payments but maintained that they were made to allow UPL to repay borrowing from Cubefunder which had been taken out for Phlo’s benefit.

Payments through Tide account

At the relevant time Mr Sarwar was the only person able to access Phlo’s Tide account or view its transactions. The account was not linked to the company’s Xero accounting system. The court heard that Phlo and UPL had historically had a close financial relationship. UPL had supported Phlo during its start-up period and in 2019 provided it with a £700,000 revolving loan facility. Mr Sarwar contended that the two businesses operated what was effectively a fluid running account.

Phlo’s other directors and finance staff, however, said the companies’ finances were separately accounted for. The court heard that Phlo’s chief financial officer repeatedly requested information and statements for the Tide account but did not receive them.

In December 2023 Mr Sarwar provided Phlo’s finance director with a bank statement showing a balance of £1,737,999 in the Tide account as at 31 March 2023. It was undisputed that the statement had been altered and that the true balance was zero. Mr Sarwar accepted falsifying the statement, describing what he had done as an “administrative error”. He said Phlo had been under extreme financial pressure and disclosure of the true position could have damaged attempts to secure further funding.

Lord Richardson described the falsification as “obviously a very serious matter”. Together with evidence of repeated attempts to conceal the contents of the Tide account from senior finance staff, it raised significant questions about Mr Sarwar’s credibility. The court also heard evidence about conversations in July 2024 in which witnesses understood Mr Sarwar to have admitted using company funds in relation to personal debts or debts of UPL and to have offered to repay sums. Mr Sarwar disputed that interpretation and maintained that the payments were made for Phlo’s benefit.

Improper purpose and lack of good faith

Phlo argued that Mr Sarwar had breached sections 171 and 172 of the Companies Act 2006, which require a director to act within their powers and in good faith to promote the success of the company. Lord Richardson rejected one aspect of Phlo’s case. He was not persuaded that Mr Sarwar lacked authority under the company’s constitution simply to make payments from its bank accounts. As chief executive, he had routinely exercised that power without individual board approval.

The central issue was instead the purpose for which that power had been exercised. Lord Richardson found that the evidence did not establish that the payments to UPL were made to benefit Phlo or prevent its insolvency. The only evidence that the funds ultimately went to Cubefunder came from Mr Sarwar, and no supporting UPL bank statements, loan documents or relevant guarantee were produced.

The financial evidence pointed in the opposite direction. UPL became increasingly indebted to Phlo during the relevant period, and the parties’ experts ultimately agreed that UPL owed Phlo £1,864,500 once all transactions were reconciled. Lord Richardson held that the growing indebtedness was fatal to Mr Sarwar’s position. Rather than promoting Phlo’s commercial interests, the payments appeared to have resulted in an increasing and unsecured loan to UPL. He also found Mr Sarwar’s explanation difficult to reconcile with the concealment of the Tide account. His attempts to conceal the information had “gone to extraordinary lengths”, including falsification of the March 2023 statement.

On the balance of probabilities, Lord Richardson found that the payments were made for the purpose of promoting UPL’s economic interests rather than those of Phlo. Mr Sarwar had therefore exercised his powers for an improper purpose in breach of section 171(b). The court also found a breach of section 172. Even assuming Mr Sarwar genuinely believed he was acting in Phlo’s interests, Lord Richardson was “entirely satisfied” that, judged objectively, his conduct was dishonest. He said the concealment of activity in the Tide account and falsification of the bank statement could not “be characterised as anything other than dishonest”. Mr Sarwar was therefore not acting in good faith.

£1.76m loss and relief refused

Mr Sarwar argued that Phlo had suffered no loss because later payments from UPL should be treated as having repaid the disputed transfers under the “first in, first out” rule associated with Clayton’s case.

Lord Richardson rejected that argument. The rule depends on an express or implied agreement about how payments within a running account are to be appropriated. Phlo could not have agreed that subsequent payments from UPL should discharge the concealed Tide transfers because its directors and financial management did not know those transfers had occurred.

The judge held that there was not a single running account because Mr Sarwar’s concealment had separated the Tide payments from the ordinary inter-company ledger. The concealed payments could not retrospectively be treated as part of that account merely because Phlo reconstructed its records after discovering them.

The court also rejected the contention that Phlo had received equivalent benefit from the payments. Lord Richardson said the evidence did not support the claim that money paid to UPL had been used to reduce Phlo’s indebtedness to Cubefunder. Applying the approach to loss in breach of fiduciary duty cases identified by the Supreme Court in Mitchell v Al Jaber, Lord Richardson held that Phlo’s loss was appropriately measured by the value of the funds transferred away. He quantified the loss at £1,756,998.

Mr Sarwar sought relief from liability under section 1157 of the Companies Act 2006, which permits a court to excuse a company officer who has acted honestly and reasonably. Lord Richardson held that the application failed at the first hurdle. Having found that Mr Sarwar acted dishonestly, he could not satisfy the statutory requirements. He also held that making payments for the benefit of another company, without authority and without the protection of a regulated or secured loan agreement, could not sensibly be characterised as reasonable. Mr Sarwar had therefore failed to show either honesty or reasonableness and was not entitled to relief under section 1157.

The court granted decree in favour of Phlo and awarded it the expenses of the action.