DIRECTORS WHO DO NOTHING INCUR MASSIVE LIABILITIES

Corporate responsibility is definitely a hot topic at the moment. Directors must perform their duties diligently. They must safeguard the company’s assets and take reasonable steps to prevent fraud and other wrongdoing. The recent decision of the Court of Appeal in Lexi Holdings Plc v Luqman demonstrates that a director who fails to keep sufficient tabs on what a fellow director is up to can expect little sympathy from the courts. The decision left two directors facing liabilities in the region of £37m and £41.5m respectively.

Lexi was a family company in the business of providing bridging finance for property acquisitions. Two sisters, Z and M, became directors of Lexi Their brother, S, was MD and the main driving force behind the company. Over a period of time S misappropriated substantial sums from Lexi amounting, to almost £60m. Eventually, Lexi went into administration and the administrators brought a claim against the directors, including Z and M, seeking to recover the missing money and compensation for the loss suffered by Lexi.

In the High Court, the Judge ruled that Z and M were only liable to repay the sums they had themselves received. He dismissed the major part of the administrators’ claim. He found that Z and M had failed to perform their duties diligently as they had been aware of S’s serious previous criminal convictions for fraud and had failed to ask questions about his director’s loan account which later proved to be fictitious. However, the Judge ruled that this failure had not caused the loss suffered by Lexi.

The Court of Appeal allowed the administrators’ appeal, ruling that the Judge had given inadequate consideration to what would have happened, had Z and M performed their duties diligently. If they had done so, they would have had concerns about the director’s loan account. If they had raised those concerns with Lexi’s auditors, and also informed them of S’s convictions for fraud, the auditors would have been put on alert and the misappropriations would not have occurred. The Court held that Z and M were liable for the loss suffered by Lexi.

This case is a good illustration of a common scenario. The victims of fraud or other wrongdoing often find it impossible to recover compensation from the real wrongdoers, who may have disappeared or be in jail or bankrupt. In such cases, they will often turn their fire against other directors who, whilst not guilty of actual wrongdoing themselves, have failed to take adequate steps to stop the wrongful behaviour. An individual who takes on a directorship must always remember that he is taking on fairly onerous legal obligations.

If you would like advice as to how to guard against the implications of this case, please contact David Dees or Nick Crook.

Filed: 23/04/2009 12:35:08