Directors’ Conduct: Liability For Making False Representations

Businesses routinely work hard to secure loans and investments to grow more profitable, but they must avoid representations that are deceitful or dishonest.  A father and son were recently found liable following  losses caused to investors as a result of of false misrepresentations.

The commercial lawyers at ParrisWhittaker in the Bahamas are highly experienced in advising directors and investors on their business relationships, rights and responsibilities; and representing them in commercial disputes.

The UK’s High Court1 recently ruled in a case that all directors and shareholders should treat as a timely reminder to act honestly, transparently and with due diligence. It found that the father and son were liable for deceit and ‘unlawful means conspiracy’ following misrepresentations made to secure lending for their business. The ruling has persuasive authority on the courts in The Bahamas.

Directors’ duties

Directors in Bahamian companies must comply with company law in the discharge of their duties and responsibilities. These are set out in the Companies Act, which states that directors must “act honestly and in good faith” and with “the same care, diligence and skill that a reasonably prudent person would exercise” in similar circumstances.

Where a director is in breach of duty, they will not usually be personally liable for any losses suffered by the company. But with all rules, there are exceptions: a director can be held liable where their wrongful conduct has directly caused loss to the company. For example, in the case of fraud, embezzlement and theft.

What happened in this case?

Two brothers were the two shareholders, in equal shares, of the parent company of Astir Maritime Ltd (Astir). The father (T) was a director of the parent company.

Astir was incorporated for the purpose of acting as borrower of a US$45m revolving loan facility under a Facility Agreement which allowed Astir (subject to conditions) to make withdrawals from the ‘funding account from time to time to finance ’permitted transactions’. Each drawdown was to be repaid within a specified time.

Various subsidiary companies gave guarantees securing the facility. T, who was an experienced businessman, provided a personal guarantee.

In his Statement of Net Worth provided to the lenders, T purported to show he owned US$46m in personal assets – which turned out to be an overstatement. The evidence revealed that 9 of 16 of the assets listed were not actually owned by T; and the values he gave for his own assets had been arbitrarily inflated. He had also ignored various encumbrances, including a substantial mortgage.

The judge went as far as to say he had lied and held no honest belief in the truth of his representations. Furthermore, the judge found that T intended that the lenders should rely upon his representations knowing they were false.

T had also made various excuses for the delays in repayments – again, these were untrue and intended to deceive the lenders into allowing the loans to continue.

The son

Astir had delivered Approved Borrower Statements to the lenders, purportedly signed by son A, to support drawdown requests for transactions involving 16 vessels. However, those statements included confirmations that the relevant transactions were permitted transactions and that no default was continuing. Both statements were untrue.

The overall substance of the claims pleaded against A was that he knew of his father’s lies, yet said and did nothing to correct them.

Liability

While the lenders’ claims against both T and A for unlawful means conspiracy succeeded, based on their deceits. The tort of unlawful means conspiracy is committed where two or more persons combine and take action which is unlawful in itself with the intention of causing damage to a claimant who does incur the intended damage.

The tort was made out in this case: T and A could not, on the evidence, obtain their desired ends – the borrowing – without causing loss to the lenders.

It is perhaps surprising that the judge declined to find A personally liable for deceit.

He supported counsel’s observation that “… it is a long-standing principle of the law that mere silence, however morally reprehensible, will not support an action of deceit”. For personal liability to arise, the party concerned must have communicated to the representee their approval and adoption of another person’s representations as their own. Failing to correct them was insufficient.

A was, however, found liable as an accessory despite claiming not to have known T’s representations were untrue. A’s assistance in the preparation of T’s Statement of Net Worth was “more than trivial”,  he knew of the dishonesty, it was pursuant to a common design – and he was thus an accessory to T’s deceit.

The decision will be reassuring to any director concerned about potential personal liability for losses caused to a company. That said, they must consistently be diligent and act in good faith to minimise any risk of being the subject of a claim if another person is believed to have lied or misrepresented the true financial position.

How can we help?

We advise directors and shareholders on corporate law and on directors’ duties and liability.

Contact us as early as possible for specialist advice and support from the award winning company and commercial lawyers at ParrisWhittaker.  Call us now on +1.242.352.6112.

1Njord Partners SMA-Seal LP v Astir Maritime Ltd [2024] EWHC 1682