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More pain for directors? Directors' liability in the twilight zone
21 June 2010
In the recent case of Lindsay v O’Loughnane it has been
held that a director who deliberately lied to a company’s customer
about the company’s financial position was liable to the customer
for the tort of deceit and that he could continue to be liable
until he corrected the position.
The defendant was a director and principal shareholder of a
company offering foreign exchange services. Pursuant to the
company’s terms of business, customers’ money was held in a trust
account. The defendant director had, for some time, been using
client funds for his own purposes. Towards the end of the company’s
trading, the director started to use funds from one longstanding
customer to purchase currency for other customers, in effect using
it as a personal bank account. The director then forwarded the
claimant customer’s foreign exchange currency to him when the funds
became available. When the claimant asked why there was a delay
before he received the funds, the defendant emailed him and falsely
said that it had been caused by an error on the part of the
company’s bank. The claimant made two further trades with the
company in September 2008 and unsurprisingly, his money
vanished.
The customer brought an action directly against the director on
the basis of the tort of deceit and alternatively on the basis that
the court should pierce the corporate veil.
The claimant’s action for deceit was successful. The court held
that if the deceit claim had been unsuccessful, it would not have
lifted the corporate veil. The measure of damages for the
claimant’s successful claim was the amount lost by the claimant
less any recovery from the liquidation of the company.
A claimant must prove four things in order to succeed in an
action for deceit:
- the defendant must have made a representation of fact which
could clearly be identified
- the representation must have been false
- it must have been made dishonestly
- the statement must have been intended to be relied upon and was
in fact relied upon.
In this case, the judge identified several representations which
the claimant had relied upon. All of these representations were
implied representations that related to the company’s solvency and
that it was trading properly and legitimately. The claimant’s case
was successful on the first implied representation, which was made
by the defendant personally in email correspondence and arose from
the way in which the defendant director accepted the claimant’s
order. This representation continued for so long as the claimant
continued to deal with the company and so it was deemed to have
been repeated in relation to the September transactions.
The defendant sought to defend the claim on the basis of section
6 of the Statute of Frauds (Amendment) Act 1828 which states that
no action may be brought on any representation or assurance
relating to the character or creditworthiness of another person,
unless the representation or assurance is in writing and signed by
the defendant.
It was held that the defendant’s emails were caught by this
section:
“In a modern context, this section will clearly be satisfied
if the representation is contained in an email, provided that the
email contains a written indication of who is sending the email. It
is not enough that it comes from a person’s email address without
his having “signed” it in the sense of either including an
electronic signature or concluding with the words such as “regards”
accompanied by the typed name of the sender of the email”.
Crucially, if the defendant’s lies to the claimant had been made
in the course of telephone conversations or meetings, with nothing
then put in writing by him, the claimant’s action for deceit would
have failed.
This decision follows the decision of the Court of Appeal in
Contex Drouzhbar Limited v Wiseman [2007] and again
highlights the implications for directors who are acting in the
twilight zone between a company’s financial difficulty and its
possible insolvency. A representation made to creditors some months
ago, on which they continue to rely, could still give rise to
personal liability, unless the person who made the representation
corrects it. If directors have given assurances of solvency where
this is no longer the case, they should ensure that further
communications are sent to creditors to advise them on the change
in the position.
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