Think before you sign!

Directors routinely sign documents on behalf of companies, but a recent Court of Appeal decision should encourage them to be more cautious about what they are signing.  In the case of Contex Drouzhba Limited v Wiseman and another a director was held personally liable for fraudulent misrepresentation, where he signed a contract knowing that the company would not be able to pay for the goods supplied under that contract. 

The Background

• Mr Wiseman, the director, signed a contract on behalf of Scott Daniel Limited (“SDL”) which set out the terms on which SDL would buy goods from Contex Drouzhba Limited (“Contex”) in the future. 
• At the time of signing the contract Mr Wiseman knew that SDL was insolvent and had no prospect of paying for any goods ordered under the contract.
• When Contex discovered that SDL was insolvent it brought a claim against Mr Wiseman
• The Court found that:
  • Mr Wiseman had made a fraudulent misrepresentation – ie by signing the contract he had represented to Contex that SDL would be able to pay for the goods, when he knew that this was not the case – and he was ordered to pay damages to Contex; and
  • the potential defence under section 6 of the Statute of Frauds (Amendments) Act (the “Act”) 1828 that a representation was made by conduct and not in writing did not apply here.
• Mr Wiseman appealed against the decision arguing that:
  • his signing the contract constituted a representation by conduct and not in writing; and
  • he had not signed the contract in his personal capacity but on behalf of SDL so it was inappropriate for him to be charged under the Act.

The Appeal

• The Court of Appeal dismissed the appeal, finding that:
  • Mr Wiseman was the controlling mind of SDL and had signed a document on SDL’s behalf which he knew contained a fraudulent representation in writing – it was appropriate for him to be personally liable for his own fraud;
  • Mr Wiseman had impliedly represented by signing the contract that SDL was able to pay for any goods ordered, knowing this to be untrue – the lower court had been entitled to find that he had made a fraudulent representation in writing; and
  • a director’s signature was sufficient evidence that a representation had been made in writing by the person charged under the Act, so the Section 6 defence was not applicabl

What could this mean for directors?

• Although this case and the subsequent appeal were decided on their own particular facts, directors should be aware that:
  • signing a contract for the purchase of goods or services on behalf of a company they know to be insolvent could amount to a fraudulent representation, for which they could be personally liable.  A representation can be fraudulent if the director makes it without honest belief in its truth;
  • directors could be held liable for representations relating to contractual obligations other than payment and in circumstances where the company is not insolvent; and
  • an action for fraudulent misrepresentation may provide another avenue for creditors looking for redress against directors of an insolvent company: this action can be brought directly by the creditor, rather than at the instigation of the liquidator.