03 September 2008

International fraud and asset tracing litigation news - summer: A signature sufficient to establish director’s personal liability for deceit

Facts of the Case

Mr Wiseman was the director of a company, Scott Daniel Limited (SDL), which, after a considerable period of trading in men's garments mostly supplied by the claimant company, was by January 1998 insolvent. In spite of this, Mr Wiseman, on behalf of the company, signed a framework agreement with the claimant agreeing to payment terms of 30 days after shipment for the supply of 3,000 men's garments per month over two years. Prior to this agreement SDL had habitually made payments late and had accumulated a substantial debt with the claimant. After signing the 1998 agreement, Mr Wiseman promised, but failed, to clear this debt. SDL's business was gradually transferred to a new company run by Mr Wiseman. Contex Drouzhba's claim was against both Mr Wiseman and his new company but the judgment deals only with the claim against Mr Wiseman. 

The Decision

The trial judge, Mr Justice Irwin found it clearly established that Mr Wiseman knew that his company was insolvent at the time he signed the agreement. He also found that the director must have understood that it was central to the agreement that SDL would be able to pay for what it ordered. He therefore found Mr Wiseman guilty of deceit and concluded that the representations as to SDL's credit were made both by SDL AND by Mr Wiseman. Mr Wiseman and SDL were thereby jointly liable in damages for the deceit. 

In his defence Mr Wiseman sought to rely on the provisions of the Statute of Frauds Amendment Act 1828 (Lord Tenterden's Act). This Act refers back to the Statute of Frauds 1677, section 4 stipulates that a guarantee cannot be enforced unless “some Memorandum or Note thereof shall be in Writing and signed by the partie to be charged therewith or some other person there unto by him lawfully authorized”. 

This section although antique has been maintained consistently through successive emendations of the Fraud Acts. It now applies only to fraudulent representations as to the credit of another person and it simply requires that such representations be made in writing signed by the person making it and not by, for example, an agent. The claimants argued that the defence was an anachronism and potentially deprived claimants of a right of action based on fraud. 

The Justice Irwin held that Mr Wiseman's signature on the agreement was both a signature on behalf of himself and on behalf of the company and thus the document was sufficiently signed as to make it actionable. 

Mr Wiseman  appealed on the only point on which he was given permission to appeal – on the application of Lord Tenterden's Act. His counsel pointed out, sections 213 and 214 of the Insolvency Act 1986 require directors to compensate the company for the period in which they fraudulently allowed the company to continue trading whilst insolvent. So if the judge were right, there may be situations in which by signing a contract, directors, already guilty of fraudulent trading, could be personally liable to a creditor in deceit. The Court of Appeal did not accept that the existence of the insolvency provisions should have any bearing on whether a creditor had an action in deceit against the director. 

Points of Interest

Lord Justice Walker, giving the only judgment, identified the real point of the appeal as deciding whether there had been an implied representation in writing, which was actionable under the Act, or by conduct, which was not.  Not every contract signed by a director contains implied representations by the director. But in this case the terms of payment contained in the agreement were an implied representation as to the ability of the company to pay. Mr Wiseman's signature on that agreement was enough to satisfy Lord Tenterden's Act. 

Thus a director's signature on a supply agreement constituted an implied representation that his company could pay for future orders and made him personally liable in deceit to the suppliers.

Category: Article