Case study

The One where the company sued its managing director

Advice was provided to a large manufacturing company which had been misled in relation to procurement of office copying equipment under the guise of a post franking savings scheme.

The client company had high expenditure of postal costs in relation to supply of goods to its customers. The client company was approached by a third party on the introduction of an existing postal services supplier. This resulted in the client company being misled to enter into finance agreements with numerous finance houses through a scheme which was alleged to provide savings on postal services via purchase of office equipment.

In fact, the alleged savings were being provided from the funds provided received from the finance houses in a scheme similar to a Ponzi scheme as contracts were rolled into new contracts annually.

Upon discovery of the fraudulent scheme, it became apparent that the client company’s managing director had been negligent in failing to read any of the lease agreements prior to signing them which formed part of the fraudulent scheme. The managing director had taken a sales representative’s word without assessing what was proposed or offered.

It should have been plain on the face of the agreements that he was committing the company to hundreds of thousands of pounds of debt, and that the debt from the previous annual agreement was being “rolled over” each time.

The managing director had the benefit of Directors in Office insurance which ought to have covered losses caused to the company as a result of his negligence.

The client company continued to employ the managing director given the highly commendable way he had acted since discovery of the fraud and generally throughout his many prior years of service with the company. However, the company client did consider he had been negligent with respect to his duty to exercise reasonable care, skill and diligence in accordance with s.174 of the Companies Act 2006.

Tenet were instructed to bring a claim in negligence against him for the loss sustained as a result of his negligence. The managing director in turn sought indemnity from his policy of insurance.

Following a long but successful mediation the claim against the managing director was resolved and resulted in a very substantial financial settlement from the insurance company on behalf of the managing director.

The learning point for other businesses is that where a loss is sustained as a result of fraud, think widely about the scope of cover on insurance policies and director duties innocently duped into causing a company to enter into a fraudulently misrepresented scheme or contract. It may be that cover exists even where there is not a policy overtly covering the ‘fraud risk’.

  • Case Study
    £500k – £1m
  • Sector
    Manufacturing
  • Service
    Breach of fiduciary duties
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