Vol 5 (2008) - Issue 3

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Recent Cases Involving Directors’ Liability

This article reviews recent 2007 case law in England and Wales with regard to attempts by creditors to pursue directors of companies as well as the companies
themselves and the reaction of the courts to this continuing trend. In particular this article will examine the following scenarios:

- the fraudulent director;
– the shadow director;
– the inactive director;
– the director liable for signing an agreement when knowing the company was insolvent; and
– the director liable to make a contribution in cases
of knowing receipt.

The fraudulent director

The recent case of Lexi Holdings PLC (In Administration) v Said Luqman and Others1 demonstrates the powers that the courts in England and Wales have to use against directors who act in a fraudulently.

Lexi Holdings was a company set up by Mr Luqman whose principal activity was the provision of bridging loan finance for the purpose of real estate acquisition. The Company obtained finance for its activities through a syndicate of banks. By July 2005 the available facility was GBP 120 million and the facility was secured by fixed and floating charges over all of the Company’s assets. Under the facility agreement all of the Company’s receipts were to be paid into one account to which the lead bank had sole signing rights. However it was alleged
that Mr Luqman transferred approximately GBP 53 million belonging to the Company to various bank accounts belonging to himself and his associates.

On 5 October 2006 the Company was put into administration. When the administrators visited the Company’s premises they discovered that virtually
all the Company’s books and papers and almost all of its computers had been removed. Almost none of the books or computers were ever recovered.

In these circumstances the administrators obtained a worldwide freezing order against Mr Luqman and against various other members of his family and other associates. The order also contained ancillary orders for the disclosure of assets and tracing information, orders for the delivery up of relevant documents, and orders restraining Mr Luqman from leaving the country and requiring the delivery up of his passports.

Mr Luqman failed to comply with various terms of the freezing order which led to an order for his cross examination and following his cross examination an application for his committal for contempt of court. The breaches of the order were as follows:

1) Failure to disclose all his worldwide assets. Mr Luqman produced only a two-page affidavit in purported compliance of his requirement to disclose all his assets. As more information became available to the administrators, Mr Luqman was forced to admit to various bank accounts that he had not previously disclosed; the beneficial ownership of various companies and the ownership of properties in both the United Kingdom and Europe.
2) Mr Luqman was found to have failed to comply with the tracing aspects of the order in that he did not disclose the details behind certain specific payments made by the company which the administrators had been unable to trace independently.
3) Mr Luqman failed to deliver any relevant documents in his possession despite an unless order being made against him that unless he delivered up the documents he would be barred from defending the proceedings. This included failing to produce a single bank statement.

Mr Luqman was therefore found to be in contempt and Mr Justice Henderson gave an initial recommendation that Mr Luqman should be imprisoned for eighteen months (the maximum sentence being two years).