Director’s Liabilities – Fraudulent Misrepresentation

When things go wrong following the purchase of an asset, particularly a high value asset, it is common to look for someone else to blame.

The Court of Appeal considered the liability of a Director for representations made to a purchaser in Foster & Anor v Action Aviation Ltd (A Company incorporated under the Laws of England & Wales) & ORS [2014] EWCA Civ 1368.

The Background

The Claimant purchased an aircraft in 2010 for US$5,000,000 from Action Aviation Ltd but for various reasons became dissatisfied with it. The Claimant became aware in April 2011 that the aircraft had been involved in a hard landing in 2009 which required it to be grounded and repaired. The incident was recorded in the log and reported to the manufacturer and insurers. However it was not (legitimately) reported to the Federation Aviation Authority in the United States. The Claimant attempted, but failed, to operate the buy back guarantee in the contract and in due course sold the aircraft for only US$2,669,556.

The Proceedings

The Claimant issued proceedings for the difference between the purchase price and the amount for which they sold the aircraft. The proceedings were brought against the UK Company Action Aviation Ltd, the Gibraltar Company, Action Aviation Ltd (the seller under the Aircraft Purchase Agreement) and Mr Harding, the Chairman of Action Aviation, personally. The Claimant alleged that when they came to see the aircraft prior to agreeing the purchase they met Mr Harding and asked him if the aircraft had ever been in an accident to which he responded no. The Claimant therefore asserted that Mr Harding was personally liable in fraud and/or on the basis that he was the undisclosed principal of the Gibraltar company and thus liable for any non-fraudulent misrepresentation made by the Company as his agent. This was rejected by the Judge who stated that Mr Harding did not consider the incident amounted to an accident and had no intention to deceive the Claimant and so did not act fraudulently. He held that the statement by Mr Harding was a negligent representation for which Mr Harding was not personally liable and he entered Judgment against the Gibraltar Company accordingly. The Judge also held that Action Aviation Holding Inc, the legal owner of the aircraft, was the principal behind the Gibraltar Company and not Mr Harding and so there could be no personal liability of Mr Harding on that basis.

The Appeal

The Court of Appeal dismissed the part of the appeal which sought to show that Mr Harding was fraudulent. They reaffirmed that where a defendant had been acquitted of fraud in a court of first instance the decision in his favour should not be displaced on appeal except on the clearest grounds. In the Claimant’s closing submissions at the original trial it was stated that Mr Harding would not be personally liable for his representation unless he was fraudulent or, the representation was negligent and it could be shown that he was a party to the contract of sale. The Court considered that it would not be appropriate to allow this concession to be withdrawn and to allow the Claimant to put forward a fresh submission that Mr Harding, as a director, had made it clear it was himself, in addition to his company, assuming responsibility for his representation. They further pointed out that representations by directors were almost always considered to be made on behalf of their companies.

Conclusion

A Director will usually only be personally liable for his representations if they are made fraudulently, or if the representation is negligent and it can be shown that he was a party to the contract.

Should you require any further assistance in relation to similar scenarios please do not hesitate to contact us.