Directors and Guarantors’ Conduct: Personal Liability
A director’s personal liability for breach of duty is generally limited to those circumstances where there has been an offence with a director’s consent or ‘connivance’ or neglect’ of directors’ duties.
A director can also be held liable for making misleading statements or misrepresenting facts to, for example, investors or shareholders. Similarly, guarantors can also be found liable for misrepresentations and deceit. When seeking to obtain commercial loans and securing investment, directors are expected to be honest and transparent.
A recent case1 illustrates the risks directors (and guarantors) take if they are untruthful. A businessman and his son were found to have caused losses to investors directly as a result of false misrepresentations.
What happened?
Two brothers each owned a 50% shareholding of a parent company of Astir Maritime Ltd (Astir) and one of them was also a director. Astir was incorporated for the purpose of acting as borrower of a US$45m revolving loan facility under a facility agreement. The agreement allowed the company to make withdrawals from the funding account to finance ’permitted transactions’, with repayment to made within a specified time.
The lenders brought a claim for deceit and conspiracy against one of the brothers (A) and their father (T).
Various subsidiary companies had given guarantees as security for the lenders; and T had given a personal guarantee. To that end, T had provided lenders with a Statement of Net Worth purporting to show he owned US$46m in personal assets. In reality, he did not own at least half of the listed assets.
Also, the values he gave for his own assets had been arbitrarily inflated; and he had ignored various encumbrances, including a substantial mortgage.
The judge concluded T had lied and held no honest belief in the truth of his representations; and furthermore he had intended that the lenders should rely upon his representations knowing they were false.
In addition, T knew that the excuses he gave for the delays in repayments were untrue and intended to deceive the lenders into allowing the loans to continue.
Approved borrower statements had been given to the lenders, purportedly signed by son A, to support drawdown requests for several transactions. However, these included untrue statements, including confirmations that the relevant transactions were permitted transactions and that no default was continuing.
The lenders argued that A knew of T’s lies but did nothing to correct them.
Who was liable?
Unlawful means conspiracy occurs where two or more persons combine and take action which is unlawful in itself with the intention of causing damage to a claimant who incurs the intended damage.
Here, both T and A were found liable for unlawful means conspiracy: they could not, on the evidence, obtain the borrowing without causing loss to the lenders.
But though the court also found T personally liable for deceit, it declined to also find A personally liable.
The judge agreed with counsel’s submission that “… it is a long-standing principle of the law that mere silence, however morally reprehensible, will not support an action of deceit”. For personal liability to arise, the party must have communicated to the representee their approval and adoption of another person’s representations as their own. Failing to correct was insufficient.
However, A was liable as an accessory to the tort of deceit. He had assisted in the preparation of T’s Statement of Net Worth in a way that was “more than trivial”, he knew of the dishonesty and it was pursuant to a common design. He was therefore an accessory.
What does this mean?
The evidence in this case clearly demonstrated the nature and extent of wrongdoing on the part of the father and son, and the findings against them. The ruling provides particular clarity on the limits to which a director may be found liable for deceit when another party has lied.
Directors and guarantors are reminded to ensure the financial information they provide is true and accurate, and if necessary, to correct statements and information if it become apparent it was not accurate.
1Njord Partners SMA-Seal LP v Astir Maritime Ltd [2024] EWHC 1682
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