Drouzhba v Wiseman & Anor

A director may incur personal liability for deceit where he knowingly makes, or procures his company to make, false representations about the company’s ability to pay. Commercial optimism does not prevent dishonesty where the director has no genuine belief in the representation. A director’s status does not shield him from liability for his own tort or from joint liability with the company where his participation goes beyond constitutional governance. Section 6 of the Statute of Frauds Amendment Act 1828 does not protect a director who jointly makes and procures representations about the company’s credit, particularly where the material representations are authenticated by his signature.

The claimant, a Bulgarian garment manufacturer, supplied clothing to Scott Daniel Ltd, a company controlled by the first defendant, Ronald Wiseman. Scott Daniel had a history of late payment and was insolvent by January 1998. Wiseman nevertheless entered a two-year framework agreement, continued ordering goods, and later signed payment schedules while transferring the business to a related company.

The claimant alleged that Wiseman and the companies had made fraudulent representations that Scott Daniel could and would pay for goods supplied on credit. The principal issues were whether the representations were fraudulent, whether Wiseman was personally liable alongside the companies, whether section 6 of the Statute of Frauds Amendment Act 1828 barred the claim, and the appropriate measure of loss.

1. Deceit. The court applied the principles in Derry v Peek (1889) 14 AC 337. Fraud required a false representation made knowingly, without belief in its truth, or recklessly. The heightened evidential caution applicable to allegations of fraud was also applied by reference to Hornal v Neuberger Products Ltd (1957) 1 QB 247.
2. Wiseman knew that Scott Daniel was insolvent, had no realistic prospect of new capital, and could not meet the obligations undertaken. His acquisition of a replacement company and transfer of the business reinforced that conclusion. His conduct was dishonest. The fact that he hoped the business might recover did not convert the deceit into mere commercial optimism.
3. Personal liability of the director. The court applied the principles in MCA Records Inc v Charly Records Ltd [2001] EWCA Civ 1441. A director is not ordinarily liable as a joint tortfeasor merely for exercising constitutional powers. Liability may arise, however, where the director personally participates in or procures the tortious acts in circumstances in which he would be liable even without his directorship. On the facts, Wiseman made most of the representations personally and procured the company to make them. He and the company were joint tortfeasors.
4. Section 6. The court held that section 6 of the Statute of Frauds Amendment Act 1828 did not provide an effective defence. Wiseman procured the company to make representations about its own credit and jointly made the representations with the company. In any event, he signed the framework agreement and several key payment documents. Those signatures authenticated the documents and satisfied the statutory requirement.
5. Loss and order. The claimant was entitled to recover the loss of profitable manufacturing opportunities which would probably have been obtained had it not continued supplying Scott Daniel on credit. After crediting the value of retained suits and fabric, judgment was entered against the first defendant for £172,964.28. Interest was left for further submissions.