Directors’ personal liability for misrepresentation
The current difficult economy is causing continual financial problems for many businesses. Directors are warned that entering into written agreements to make payments when they know their company is unable to meet its debts may equate to deceit under the terms of the Statute of Frauds (Amendment) Act 1828.
This could result in personal liability for the director who has made an implied representation about his company’s ability to pay.
The case of Contex Drouzhba Ltd v Wiseman and another  EWCA Civ 1201,  ALL ER (D) 293 (Nov) dealt with the case of a director who signed payment terms on behalf of a limited company.
The facts of the case were that the company’s main trade was with the claimants. The defendant knew that the company was no longer able to pay its business debts and that there was no likelihood of fresh capital to rescue the company.
Knowing this, the director still signed an agreement with the claimant on behalf of the company agreeing to make a bank payment no later than 30 days after the shipment of goods.
The judge found that by signing the agreement, the defendant director had implied that the company was able to pay for the goods and that this implied statement was fraudulent as he knew that the company would not be able to pay.
The agreement constituted a statement in writing, as required by section 6 of the Statute of Frauds (Amendment) Act 1828, which states that:
“No action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade, or dealings of any other person, to the intent or purpose that such other person may obtain credit, money, or goods upon, unless such representation or assurance be made in writing, signed by the party to be charged therewith.”
Where the statement is made in writing, the above section is no defence to the allegation of fraud.
Statements in writing
With many agreements now being made via email, directors should be aware that this case could extend to business dealt with electronically where no actual ‘wet’ signature exists or possibly without a signature at all. If there is an intention to enter into an agreement, then it may be that an email will be held to be equivalent to a statement in writing for the purposes of establishing whether a director has made an implied statement as to their company’s ability to pay.
Personal liability of directors and recovery of funds
The finding meant that the claimant was entitled to recover damages from the defendant personally. This differs from recovery against a director by an office holder following insolvency for matters such as antecedent transactions, misfeasance, wrongful trading and fraudulent trading.
The main difference is that a creditor relying on the Statute of Frauds (Amendment) Act 1828 can recover assets straight from the director who has personal liability for the fraud notwithstanding the insolvency of the company. If the office holder brings a claim then recoveries are made to the company and these will subsequently be distributed to all creditors in accordance with the order of priority. This is likely to mean that an unsecured creditor will not fully recover their debt and they could recover nothing.
Trading while insolvent
If directors continue to trade while knowing their company to be insolvent and have no prospect of surviving, they also expose themselves to claims by office holders’ for wrongful trading and/or misfeasance.
Directors have a duty to mitigate losses and should not arrange further trades, nor should they pay some creditors in preference to others.
There is a further risk of committing fraud if they hold the company out as being able to pay and enter into new payment agreements on behalf of the company. Fraudulent trading is more serious than wrongful trading and could expose a director to a higher level of personal liability.
Fraudulent trading involves an element of deceit. While a director may have been unclear as to whether or not they were committing wrongful trading, if there is an intent to deceive, then this is considered fraudulent.
Fraudulent trading requires:
- The aim of trading fraudulently, not simply trying to secure goods from a creditor, but subsequently carrying on trade as well
- It could be a single transaction
- The person committing fraudulent trade must have a managerial position or position of control within the company
Guidance for Directors and Creditors
Creditors will need to think carefully about which route to recovering funds is likely to be best for their situation. Directors are strongly advised to seek legal advice if they have any concerns about their company’s ability to pay its debts and whether they could be trading while insolvent.
In dealing with an insolvency, an office holder will examine whether directors have acted responsibly, both before and during the insolvency and whether they took action to mitigate losses. Failure to meet these criteria could result in penalties, including personal liability for damage and disqualification as a company director for up to 15 years.
By seeking legal advice from expert insolvency solicitors, you can demonstrate responsible action as well as securing help with the next steps in dealing with your company’s situation. You could also minimise the risk of facing personal liability for losses.
If you ask us to advise you, we can establish whether your business is insolvent and discuss the options open to you. This could be restructuring, refinancing or winding up your company. It is important to address difficulties head-on and put a robust plan in place that will move you on from the difficulties you are facing.
Taking prompt action will not only give you the best chance of preventing the situation from becoming more problematic, but it will also demonstrate that you have taken responsible steps to minimise losses, reduce the risk of allegations of trading while insolvent and show that you are seeking to manage the situation in the best way possible.
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If you would like to talk to one of our expert legal team about a contract dispute, call us on 020 3968 6030, email us at firstname.lastname@example.org or fill in our contact form and we’ll be happy to help.
The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.