Lexi Holdings Plc (in admin) v Luqman

The claim concerned large-scale misappropriations by the managing director, Shaid Luqman, and accessory or supervisory liability alleged against his siblings, the second to fourth defendants. The court analysed the applicable standards for directors' duties (drawing on the objective/subjective standard in section 214(4) Insolvency Act 1986 and authorities such as Re Barings and Re Westmid) and applied a hypothetical causation exercise to ask what would probably have occurred had the daughters performed their duties. The judge found that although the sisters had been inactive and had admitted knowledge of their brother's prior convictions, the claimant failed to prove on the balance of probabilities that that inactivity caused the principal loss: reasonable steps by them would, probably, have been fobbed off by Shaid or would not have led Barclays to enforce early.

Accordingly the court rejected the broad causation claim for damages arising from inactivity, but found both sisters liable to account for identifiable payments by Lexi used to fund their property purchases and held them liable under the Companies Act 1985 s.322 in respect of the specific property transfers which they had personally authorised or executed. The court assessed credibility of witnesses, made specific findings of unreliable or dishonest evidence (notably in relation to one sister) and reserved quantification of sums for further hearing.

Background and parties: Lexi Holdings (in administration) sued a number of defendants including the managing director, Shaid Luqman, and his siblings (the second, third and fourth defendants). Shaid was found to have misappropriated very large sums. The claim against the sisters alleged liability by authorising or permitting Shaid's misconduct or by wholesale neglect of their duties as non-executive directors. By earlier interlocutory rulings many issues had been determined and summary judgment had been obtained in part.

Nature of the claim / relief sought: Lexi sought money judgments, accounts and inquiries, and compensation/recoupment under statutory provisions of the Companies Act 1985 (notably provisions dealing with loans to or transactions with connected persons (s.330 and s.320) and liability for authorising transactions (s.341(2), s.322(3))). It also sought recovery of monies received by the defendants out of Lexi’s assets.

Procedural posture: Following an earlier November 2007 judgment on summary judgment applications the trial concentrated on causation (whether the sisters' inactivity caused the losses), whether further alleged misappropriations caused loss, whether either sister received improper benefits, and whether any of the impugned transactions contravened ss.330/320 so as to found direct authoriser liability under ss.341/322. The court had previously struck out Shaid’s defence and obtained default judgment against him; Waheed (one brother) had been the subject of a money judgment and later petitioned into bankruptcy; the court directed a single trial of the outstanding discrete issues.

Issues framed:

• Causation: did the directors' total inactivity cause the losses arising from Shaid's misappropriations and the s.330/320 transactions?
• Misappropriation losses not already determined at summary judgment: did they cause loss and, if so, in what amount?
• Improper receipts: did either sister receive money, property or benefits for which they must account?
• Statutory liability under ss.330/320: were certain borrower/recipient companies connected with a director and were the sisters authorisers under ss.341(2)/322(3)?

Court’s reasoning and findings: The court set out the legal standards for directors' duties (including delegation, ongoing supervisory obligations and the combined objective/subjective standard enshrined in s.214(4) Insolvency Act 1986 and discussed in authorities). It undertook the required hypothetical causation exercise: identifying what the sisters should have done, then asking what would probably have followed had they so acted. The judge made critical credibility findings about witnesses, accepting that one sister gave largely unreliable or deliberately untruthful evidence in parts, but also recognising the extraordinary persuasiveness and deceit of Shaid. The court concluded that, on the balance of probabilities, even if the sisters had told the board or auditors about matters they knew (including Shaid’s prior convictions and some connected transactions), Barclays (the syndicate lead) would, in the circumstances, probably still have pursued a cooperative strategy rather than immediate enforcement; the cooperative route had been chosen in reliance upon professional (KPMG) advice and the prospect of security (notably the Ten Acre property) and so would likely have permitted Shaid to continue to cause loss. Accordingly causation for loss by directors' inactivity was not established. By contrast, the court found primary liability where monies from Lexi were clearly applied to the sisters' property purchases and where each sister had signed or executed specific property transfer documents in breach of s.320, such that s.322 liability and liability to account for identified receipts were established. Quantification of liabilities and inquiries were reserved where necessary.

The claim against the sisters was allowed in part. The court held that the claimant failed to prove on the balance of probabilities that the sisters' total inactivity caused Lexi's principal losses caused by Shaid (claim for damages for inaction dismissed), but nevertheless found both sisters liable to account for identified receipts paid from Lexi and liable under Companies Act 1985 s.322 for the particular property transfers they personally authorised or executed. Quantification of those liabilities and any remaining inquiries were remitted for further hearing.

The judgment follows an earlier judgment delivered by Briggs J in November 2007 on summary judgment applications (where much of the primary wrongdoing by the managing director Shaid was found established, and money judgment obtained against the brother Waheed). Default judgment was obtained against Shaid on 6 December 2007. An application for permission to appeal the November judgment by the three defendants was dismissed by the Court of Appeal on 21 February 2008. A consent order of 21 April 2008 narrowed the issues for trial and extracted quantum issues for later consideration. This trial determined causation, improper receipts and statutory authoriser liability for specified transactions.