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Directors may be liable for misrepresenting ability to pay

Regardless of size, managing accounts receivable is an important element in running a successful forwarding operation. Credit terms are usually set at the beginning of the customer relationship through a credit agreement that stipulates a credit limit, payment terms, and interest rate, and is signed by representatives of the forwarder and the customer. Late payment is often seen as a cost of doing business, but often chronically late payers become delinquent. By the time the forwarder closes in to realize their account through a court judgment or seizure order, all that is left is an empty piece of paper with a corporate number. And while the credit agreement was executed by a signing officer – often a director – the agreement binds only the company and not the individual representative, who too often forms a new company and begins anew their pattern of late payment and delinquency.

A recent Queen’s Bench case, however, indicates that in some circumstances a creditor will be able to claim against the individual officer as well as the corporation. The case involved a claim by a plaintiff clothing manufacturing company against a corporate debtor and it’s director personally. The defendant corporation was a wholesaler of clothing located in England. It had done business for many years with the manufacturer in Bulgaria, originally a state-owned factory but a private enterprise by the time the dispute arose.

The purchaser was a habitual later payer. In 1998, amid growing concern about its customer’s ability to pay, the manufacturer sat down with the sole executive director to execute a new credit agreement covering a further two-year relationship and requiring almost immediate payment of past-due accounts and a strict thirty-day payment schedule for new business. On the strength of this agreement the manufacturer continued to trade on terms with the defendant corporation, which was in fact insolvent and which was never able to clear its accounts.

The manufacturer brought suit against both the debtor corporation and the officer who had signed the agreement. It argued that the new agreement necessarily included a representation that the corporation had the resources to satisfy its debts. At the time of the agreement, however, the director was aware that the corporation could not meet the terms of the agreement and there was no reasonable prospect for it to return to solvency and satisfy its debts. The Court accepted this argument, which led to the conclusion that there had been deceit by the director and the company in the execution of the new agreement.

England’s Statute of Frauds Amendment Act 1828 includes a provision at s 6 that :

‘No action shall be brought whereby to charge any person upon or by reason of any representation or assurance made or given concerning or relating to the character, conduct, credit, ability, trade, or dealings of any other person, to the intent or purpose that such other person may obtain credit, money, or goods upon, unless such representation or assurance be made in writing, signed by the party to be charged therewith.’

The Court did not allow this to stand as a defence to the director’s personal liability. In addition to his own deceit, he had procured the deceit of the corporation, which was actionable. At the same time, the director and the company were making false representations jointly about the creditworthiness of the company. As the representations were joint, they were not representations about the credit of “any other person”, and were therefore outside the protection of the section.

The Court also rejected the proposition that the individual defendant’s status as a director could shield him from personal liability. The Courts have long wrestled with the conflicting policy interests between preserving the limited liability nature of an incorporation and ensuring that individuals can beheld accountable for their tortious conduct. Where a director acts only through the constitutional organs of the corporation, he or she is free from liability. Where, as here, the director commits deceit himself and also procures the company to do so, the policy of the law must be in favour of a remedy, and the director may be held as a joint tortfeasor with the company.

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