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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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Vicki Dunstall 0115 976 6502 Associate

Dominic Offord 0115 976 6149 Partner

The content of this bulletin is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.