Over Taylor Biggs

The Court decided that the two non-executive directors were liable for the dishonest misapplication not because of any positive step taken by them but because their inactivity as directors had led to the resulting loss.

The Company provided bridging finance for property acquisitions.  Funding for this was obtained from a banking syndicate, including Lloyds Bank, Barclays Bank and the United National Bank.

The Managing Director was Shaid Luqman (SL).  His eldest sister, Zaurian Luqman (ZL) was the controlling shareholder.  ZL was a director of the Company, as was SL's other sister, Monuza Luqman (ML).  There were two other independent non-executive directors, who were not related to Luqman family.

By way of some 100 payments to 16 recipients, principally involving relatives of SL, £59,607,498 was dishonestly misappropriated from the Company by SL via three bank accounts.  One of the main recipients was SL's brother, Waheed Luqman (WL).

At the time of the misappropriations the accounts of the Company recorded a Director's Loan Account in the names of SL and ZL, whereby SL and ZL purported to loan the Company funds (on SL's contention some £62m at its maximum), which substantially increased around the time of the misappropriations to a level where it was not reasonable to support SL's contentions that such monies were from him personally or his relatives, followed by subsequent repayments of the Director's Loan Account.

Legal proceedings were brought against ML, ZL, SL and WL to recover the money misapplied.  SL was sent to prison. WL was declared bankrupt and the recovery proceedings therefore focused on ML and ZL and their role in the misappropriation. 

The Court had to consider whether the total inactivity of ML and ZL as directors breached the fiduciary and common law duties of care owed to the Company and whether they were liable in damages or to compensate the Company for losses caused by such breaches of duty.

SL had numerous convictions for obtaining or of attempting to obtain property by deception and both ML and ZL were aware of this. 

It was not alleged that ML and ZL knew about SL's misconduct.  In the earlier High Court case because of their total inactivity as directors, both ML and ZL were found to have breached their fiduciary and common law duties of care.  However, the High Court concluded that they were not liable for the misappropriation by SL because they had not caused the misappropriation. 

The Company, which was by then in Administration, appealed this decision, on the basis that despite ML and ZL not knowing about SL's misconduct, if they had carried out their duties in an appropriate fashion they could have investigated and taken action that could have prevented (or minimised) the loss suffered by the Company.

The Court of Appeal allowed the appeal holding that :-

• ML and ZL knew of SL's convictions and ought to have known that the Director's Loan Account, as shown in the accounts, required a convincing explanation and
• ML and ZL would have known of the Director's Loan Account had they performed their duties as directors, and were therefore liable for the amounts misappropriated after their respective appointments as directors.

The judgment raised concerns that if ZL had performed her duties as a director of the Company as and when she should have done, it was probable that the Company would have gone out of business before the majority of the misappropriations took place. 

The logical conclusion of any reasonable board of directors would have been to cease trading and wind up the Company or, at the very least, advise the Company's auditors, which information would then ultimately have ended up before the lending banks sought to recover their loans. 

However, in not having done so and the business continuing after the new directors were appointed, the Court decided that ZL was under a duty to inform the incoming non-family directors of what she knew or ought to have known, namely the convictions of SL and the evident fact that a Director's Loan Account for a substantial sum of money was fictitious. 

If ML had not known before that this director's loan was fictitious, she ought to have known shortly after her appointment, both from ZL and from performing her own duties as a director of the Company.  The non-family directors claimed to have no knowledge of the misappropriations (they did not have the same level of knowledge about SL, as had ZL and ML) and took no steps to address the situation, which, it was argued they would have done had they known what ML and ZL had done.  These steps would have included calling a meeting of the board, taking appropriate professional advice, seeking to remove SL as a director, removing him from the bank mandates, advising the Company's auditors and, only if the board did nothing, they would have resigned.

The Court was critical that none of the Directors had obtained legal and other advice about the conduct of SL in the anomalies in the accounts and, in particular, regarding the Director's Loan Account.

This case is a useful guide of the extent of a director's duties.  One point of which little was made concerned the Company's breach of Section 330 Companies Act 1985 by making unlawful loans to directors or persons connected with a director. 

If such a loan is made, the other directors who sanctioned it, whether advertently or not, become jointly and severally liable to repay it.  This particular argument was not explored in any detail.  It was simply noted that the Company had breached this Section of the Companies Act as well as other Sections involving substantial property transactions.

The point to take away from this case is that a non-executive (or indeed an executive director), who simply buries his head in the sand and fails to take seriously the role of director risks personal liability for losses suffered by the Company of which he or she is a director.

This applies even if the relevant misappropriations or loss arises out of matters of which the relevant directors claim no knowledge.   Directors who are concerned about another director's conduct should call a meeting of the directors to discuss the matter and seek appropriate legal or accounting advice (or both) so as to show they have taken reasonable steps to avoid the Company suffering any loss.

Lexi Holdings PLC (In Administration) v Luqman & Others [2009] EWCA Civ 117