Directors' Fiduciary Duties: Inactivity May Be A Breach Of Duty

In a recent case the Court of Appeal has ruled that, where a

director commits fraud, his or her fellow directors are in breach

of their own duties to the company in allowing the fraud to happen,

and cannot defend themselves on the grounds that the fraudster

would have deceived them if they had tried to prevent the fraud.

The case reiterates an earlier judgement where it was said that it

is in itself a breach of duty by the remaining directors to allow

themselves to be dominated or bamboozled by one of their

number.

Lexi appealed against a decision that two of its directors (M

& Z) were not responsible for the misappropriation of funds by

the managing director (S), their brother. Over a number of years

the managing director had taken almost £60 million from the

company through fictitious director's loans, false facility

letters and misapplication of three of Lexi's bank accounts.

The three siblings were part of a close-knit family and M and Z

were aware that S had previous convictions for dishonesty and

obtaining property by deception. This information was not initially

disclosed to the bank or the other directors. Z also failed to

monitor the misappropriated director's loan account, on which

she was a named person.

At the original hearing M and Z were acquitted on the basis that

they were liable only for monies paid to them and that their

inactivity as directors had not caused Lexi's loss. At this

hearing the judge suggested that had M and Z attempted to play a

more active role in the company they would have been fobbed off by

the trickery of S. The judge had used the ability of S to trick

other, non-family, members of the board as a factor in the

exculpation of M and Z.

On appeal Lexi submitted that the inactivity of M and Z was a

further breach of fiduciary duty. The appeal was allowed comma not

semi-colon on the evidence provided the Court of Appeal finding

that the conclusion reached by the initial judge was incorrect. M

and Z knew of S's convictions and should have asked the

appropriate questions to satisfy their fiduciary duties. Had they

done so they would soon have realised the extent of the fraud being

perpetrated at the company. If M and Z had acted properly the

auditors and other directors would have been made aware of the

situation, the auditors would have been unable to provide

unqualified accounts and the increased banking facilities would not

have been available.

The key point was "that any individual who undertakes the

...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT