Stuart Evans examines how bold statements made by directors about the financial strength of their company may come back to haunt them under both the civil and criminal law.
We read every day that times are tough. The performance of various companies is starting to taper off and for some, their financial health as well. However, customers still need to be serviced, and key supplier relationships must be maintained. Equally, shareholders and funders must be kept on side. But how does the director of a beleaguered company keep suppliers on side, even though there is a high risk that the company cannot pay them? These were the facts in Contex v Wiseman  EWCA CIV1201, where a director, who was deemed to have known that his company could not pay for goods, was held to have given an implied personal warranty as to the company’s credit worthiness by signing a contract on its behalf. Accordingly, he was personally liable for the debt suffered by the supplier. This must now be an everyday situation for a number of companies in the UK, and we will expect to see more of these types of cases in the near future.
The concept of personal liability is a frightening one to directors who believe that they are, in essence, insulated from liability when acting on behalf of an unlimited company. But for the reckless director, the noose is tightening; the Contex case is just the start of it.
We expect the tort of deceit also to rear its head in these current difficult times. The essence of deceit is where an individual falsely represents certain key facts to another party. When that party suffers loss as a result of relying on such representation, there will be a potential action in deceit. The state of mind of the defendant is important; the defendant must know the representation to be untrue, have no belief in its truth or to be reckless as to its truth. The defendant must also intend that the other party should act on reliance on such representation and that the party in fact does so.
Consider again the facts of the Contex case. A director, knowing that his company cannot pay for goods, and who gives clear, provable representations to the supplier that this is not the case, could also face an action in deceit. This could be significant, as a claim in fraud does not require a special relationship to be shown, and there are no deductions for contributory negligence. Equally importantly, damages are likely to be higher than for a warranty claim.
Once we are into the realms of fraud, we then turn to the criminal law, and in particular the provisions of the Fraud Act 2007. Section 2, entitled “Fraud by False Representation” provides that if a person dishonestly makes a false representation, and intends thereby to make a gain for himself or to cause loss for another, then this will be an offence punishable for a maximum period of 10 years or to a fine. No laughing matter.
So to the director who puts a third party such as a supplier in peril, by exaggerating the company’s performance, its debt profile and/or its credit worthiness, those who have suffered at your hands now have a number of weapons in their armoury. Importantly, none of such weapons require a company to have gone into an insolvency process and required, for example, a liquidator to have taken up the cudgels on their behalf. Warranties, deceit and offences under the Fraud Act are capable of being pursued by members of the public or the police as appropriate.
There remain the spectres of claims for fraudulent and wrongful trading under the Insolvency Act, and disqualification under the Company Directors Disqualification Act for directors who, for example, act to the detriment of creditors and/or show themselves to be unfit. These are very well trodden paths. However, we suspect that some of the other matters we have referred to above have a slightly fresher tinge to them, and in the current environment, we expect them to be deployed with ever more regularity.
For further information on this or any other issue on directors duties, insolvency or commercial fraud, please contact Stuart Evans or Clive Lee by emailing Stuart or Clive or by calling them on 08450 990045, or speak to your usual contact in the Commercial Disputes Team.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.