Rubber Stamping by Directors can lead to Liability – Lexi Holdings -v- Luqman

25 March, 2009

The case of Lexi Holdings Plc (in administration) -v- Luqman and others [2009] EWCA Civ 117 is an object lesson to directors of the dangers of turning a blind eye to the activities of their fellow directors.

This Court of Appeal case makes it clear that directors’ duties extend to being pro-active where there are grounds to be suspicious of the activities of a fellow director.

The facts were that a director of the company misappropriated £60m of company funds.  The administrator of the then insolvent company sought to recover money from that director and his two sisters, who were also directors of the company.

At first instance the two sisters escaped liability except to the (relatively small) extent that misappropriated money had been paid to them.  The Court of Appeal overturned this and gave judgment to the administrators to the tune of approximately £40m against each sister on the basis that they had breached the duties they owed to the company and failed to prevent a loss to the company that could have been prevented.

The Judge at first instance appears to have been swayed by the fact that the brother was controlling and a bully.  The Court of Appeal did not consider this relevant.  What was relevant was the sisters’ knowledge of their brother’s previous convictions for fraud and that aspects of his business dealings required convincing explanations.

As directors they had a duty to be on guard and pursue adequate explanations in response to “searching questions”.  Had they done so then the brother could not have satisfied them that his actions were genuine.  The should then have sought advice and informed the company’s auditors and other directors.  Had they done so then the court concluded that a major part of the misappropriation could have been prevented.

As a result the sisters were found liable for just such a major part of the misappropriation.

Conclusions

Directors must not turn a blind eye to things that should put them on alert as to risks of fraud or misappropriation.  To do so is to fail in the duties that owe to their company.

It should be noted that the case was an appeal from case that commenced in November 2006.  Since then directors’ duties have been codified pursuant to the Companies Act 2006.   As the duties have to some degree been expanded it is now more important than ever for directors to be aware of those duties.  Please see the article Directorship – Doing Your Duty for a more detailed analysis of directors’ duties.

 

Reviewed in 2015