Inactivity of directors can render them liable for the dishonesty of fellow directors.

This was the Court of Appeal's finding in Lexi Holdings PLC (In Administration) v Luqman & Ors. Two sisters and their brother were co-directors, along with other directors, of a finance company. The brother misappropriated approximately £60 million over a number of years by means of a fictitious directors' loan account, false facility letters and misapplication of three of the company's bank accounts. The brother had previous convictions for dishonesty and deception offences. The sisters were non-executive directors who had little involvement in the running of the company. However, they did know of their brother's previous convictions, unlike the other directors of the company. The administrator of the company pursued the sisters for the losses to the company caused by their brother's misappropriation on the basis that had they acted on their actual or constructive knowledge of their brother's character and business dealings, the losses would not have occurred.

The Court of Appeal held that the sisters' duties as directors required them to be on guard in relation to searching questions they should have put to their brother in relation to aspects of his dealings which they should have known, from the start of their directorships, required convincing explanations. They had been totally inactive and were in breach of their fiduciary and common law duties of care to the company. The sisters should have sought advice and informed the company's auditors and other directors of concerns they should have had, this would have prevented subsequent misapplications. The sisters were liable to recompense the company.

Things to consider

The activities, or lack of activity, of all directors may need to be considered when seeking to recover loans from a company where there appears to have been a breach of the directors' duties of care to the company. The office of a director is an important role and if the duties are not discharged, an individual should expect a penalty.