Lexi Holdings v Luqman & Anor

A director’s duty to supervise delegated functions remains personal and depends on the facts, including the director’s role, knowledge, skill and experience. Delegation does not remove the duty to acquire sufficient understanding of the company’s business or to communicate material information to fellow directors.

For causation, the court must construct the probable counterfactual course of events if the duty had been performed. Loss is recoverable only to the extent that the breach probably altered the company’s financial position, subject to remoteness and contributory negligence. A director’s inactivity may constitute breach, yet fail to cause loss where the intervening decisions of other directors, auditors or lenders would probably not have prevented the fraud.

The claimant, a company in administration, pursued claims against two directors concerning losses caused by the fraud of the managing director, their brother. The defendants had previously been found to have breached their duties by total inactivity, but causation and other liabilities remained for trial.

The issues included whether the inactivity caused losses from misappropriations and unlawful transactions, whether the defendants had received company money, and whether they were directly liable for authorising transactions contravening sections 320 and 330 of the Companies Act 1985.

1. Causation. The defendants’ total inactivity constituted breaches of their duties as directors. Directors have collective and individual responsibility for the company’s affairs. They must acquire and maintain sufficient knowledge of the business, supervise delegated functions, and communicate material information to fellow directors. The objective standard is supplemented by the director’s actual knowledge, skill and experience.
2. The defendants should have reported the managing director’s previous convictions for business dishonesty to the board. They should also have raised loans and property transactions which appeared to contravene sections 330 and 320. Their duties did not require them to report those matters directly to the banks, advisers or police. They were not required to scrutinise the facility agreement or every bank account, and the evidence did not establish that the fictitious loan account would probably have been exposed.
3. The counterfactual analysis required assessment of what the board, auditors, lenders and other stakeholders would probably have done. The independent directors would probably have sought to resign and inform the auditors. Even if the information had reached Barclays earlier, the bank would probably have investigated and continued a cooperative strategy rather than immediately enforcing its security. The claimant therefore failed to prove that the breaches caused the principal losses from the fraud.
4. Improper receipts. Each defendant was liable to account for company money used to fund property purchases. Monuza was additionally liable for receipts of £75,800 and £49,993. It was no defence that the thief had used company money to repay a debt owed to the recipient.
5. Statutory liability. The claimant had to prove authorisation under sections 341(2) and 322(3); the director then bore the burden of proving the statutory absence-of-knowledge defence. Signing transactional documents authorised the transactions, even where the director had not considered their contents. Monuza was liable for three property transactions and Zaurian for seven. Their liability was not extended retrospectively to earlier transactions merely by implied authority.
6. The claim for the alleged £425,000 loan to Serton failed. The claimant established that Lexus, Halfway, KNJ and Beauchamp were connected with the managing director. The extent of liability under section 320 remained to be determined at a further hearing if not agreed.