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Company Directors Beware
The Court of Appeal’s decision in
Contex Drouzhba Ltd v Wiseman
and another to hold a director
personally liable for deceit, where he had signed an agreement
on behalf of the company committing the company to making
payment for goods, knowing that is had no prospect of being
to afford to do so, sends a clear message to all directors
- be careful what you sign.
Background
Directors can be personally liable
for deceit where they make a representation to another person
which is fraudulent.
However, section 6 of the Statute of Frauds (Amendment) Act
1828 provides a defence in that the representation must be
made in writing signed by the party to be charged; it cannot
be a representation made by conduct.
The Facts
Mr Wiseman (W) was the director
of Scott Daniel Limited (S Ltd). W signed, on behalf of S
Ltd, a purchase agreement
with Contex Drouzhba Ltd (Contex) to pay for goods to be
ordered in the future. W knew that S Ltd would not meet the
requirements of this agreement as it was insolvent and had
no prospect of ever being able to pay for the goods.
When
this became apparent Contex brought a claim against W. At
trial the judge found the following:
- W’s act of
signing the agreement created an implied representation
that S Ltd had the capacity to pay for the goods;
- W’s representation
was fraudulently made as W was aware that S Ltd was insolvent
and had no prospect of an injection of capital to resolve
this;
- On this basis W was liable for damages
in deceit;
- In addition the defence in section 6 of
the Statute of Frauds
(Amendments) Act 1828 did not apply as the judge found
the representation to have bee made in writing signed
by the
party to be charged (W).
The appeal
W appealed against the final
point of the decision that the defence in section 6 did
not apply. He argued that the judge
should have found that the representation made to Contex
(signing the agreement) was one of conduct, and not a representation
in writing and that accordingly the defence in section
6 should have applied. W also submitted that he had signed
the document on behalf of the company, and thus had not
signed
it in his personal capacity and so should not have been
"the person to be charged" under the Act.
Decision
The Court of Appeal dismissed the
appeal. It held that:
- Where the director was effectively the
mind of the company, as
W was, and where he signed a document on behalf of the
company containing a representation he knew to be fraudulent,
it
was clear that the director could be personally liable
for his own fraud.
- In this case, W has implied represented
that
S Ltd had the capacity to pay. W had known this to be
untrue and the judge had been entitled to hold W had made
a fraudulent
representation in writing, and was therefore the W "person
to be charged" within section 6.
- Whist the Act required
the representation to be in writing there was no reason
why the director’s signature on the document
would not be sufficient evidence to show a representation
was
made
in writing by the person charged so that the section
6 defence did not apply.
The implications for directors
The case
raises - but does not answer - a number of questions. Much
depends on whether the courts are prepared to apply
the principle of director's personal liability
in deceit to factual situations that differ materially
from
the circumstances
in the Contex case.
Whilst most of the appeal was concerned
with the section 6 defence, the case is more important
for what it says
about the potential liability of directors who sign agreements
on behalf of their company. The following propositions
can
be drawn from the case:
- Although each case will depend
on its own facts, there is a good chance that in other
cases a director (who
is the
controlling mind of the company) and who makes a
fraudulent representation that the company can make a payment
(i.e.
when it can't) by signing a contract on behalf
of the company, will be personally liable in deceit;
- This
represents another
possible route, additional to the fraudulent and
wrongful trading provisions of the Insolvency Act 1986, for
creditors
of an insolvent company to obtain redress against
its directors. The decision is a particular concern for directors
trading
in insolvency situations or situations or doubtful
solvency
and who are considering taking on credit to maintain
the business while a solution is sought;
- There is in principle
no reason why the decision should be restricted to
insolvency situations;
- Nor should there be any reason why the
representations should be limited to payment (although
the Court of Appeal
did state that it was not saying that every contract
signed
by a director contains an implied representation
by that director - each case will depend on its own facts);
- W
was the controlling mind of the company, so that
his knowledge
was that of the company. It is not clear whether
the principle of liability in deceit will remain restricted
to these types
of director or extend to any director who makes a
representation
on behalf of the company;
- The Court of Appeal emphasised
the fraudulent nature of W’s conduct and gave
no indication that the principle of personal liability
could
be extended
to negligence. Whilst arguments could be formulated
either way, on balance it is probably that the courts
will be
reluctant to extend the principle to pure negligence;
- Directors
could
consider including a disclaimer of personal liability
in any agreements they sign on behalf of their
company. This
will not assist where the representation is made
fraudulently but could assist against the - at present theoretical
- risk of personal liability for negligent representations.
For
further information, please contact Jeremy
Priestley, Managing
Partner
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