Lexi Holdings plc v Ruqman [2009] EWCA Civ 117

Lexi Holdings, a bridging finance company, had £59.6 million misappropriated by its managing director Shaid Luqman. The Court of Appeal held that his sisters Monuza and Zaurian, as directors, were liable for losses caused by their total inactivity, as they failed to inform fellow directors of Shaid's criminal convictions and a fictitious directors' loan account.

Facts

Lexi Holdings plc was engaged in providing bridging finance, funded by a syndicate of banks. Shaid Luqman was the managing director, with his sisters Zaurian (controlling shareholder and director from June 2001) and Monuza (director from October 2003) also on the board. Between October 2002 and November 2006, Shaid dishonestly misappropriated £59,607,498 of Lexi’s money through approximately 100 payments from three bank accounts. Lexi went into administration in October 2006.

Both Monuza and Zaurian knew of Shaid’s previous criminal convictions for dishonesty in the 1990s. The company’s accounts recorded a ‘Directors’ Loan Account’ showing balances of up to £22 million, which Briggs J at first instance found to be entirely fictitious. Both sisters knew that the Luqman family’s means could not have extended to such amounts.

Issues

Primary Issue

Whether the breaches of duty by Monuza and Zaurian through their total inactivity as directors caused the losses arising from Shaid’s misappropriations.

Secondary Issues

What steps should Monuza and Zaurian have taken had they complied with their duties as directors? What would have been the consequence of such compliance?

Judgment

The Court of Appeal (The Chancellor, Richards LJ, and Hallett LJ) allowed the appeal. Briggs J at first instance had found that Monuza and Zaurian had breached their fiduciary and common law duties through total inactivity but concluded that causation had not been established. The Court of Appeal disagreed on causation.

The Chancellor emphasised the principle from Re Westmid Packing Services Ltd [1988] 2 BCLC 646:

“A board of directors must not permit one individual to dominate them and use them, as Mr Griffiths plainly did in this case.”

The Court held that Briggs J erred in comparing the position of Monuza and Zaurian with that of Mr Jewson and Mr Gresham, who did not know of Shaid’s convictions or the family’s limited means. The Chancellor stated:

“To my mind the significance of the Directors’ Loan Account was that it demonstrated that Shaid’s dishonesty was continuing and on a very large scale.”

Zaurian, knowing both the convictions and that the Directors’ Loan Account was fictitious, should have informed the auditors. Had she done so, unqualified accounts could not have been provided, and the increased banking facilities (a condition precedent being unqualified accounts) would not have been granted, preventing the subsequent misappropriations.

Monuza, upon her appointment in October 2003, ought to have known of both matters. At that point, the three non-Shaid directors had the power under Article 13.2 to remove Shaid, and proper performance of duty required either imposing external controls on Shaid or removing him.

Implications

This case reinforces the principle that directors cannot escape liability by allowing themselves to be dominated or deceived by a fellow director. Total inactivity is itself a breach of duty. Where directors have knowledge of facts suggesting dishonesty (such as prior convictions), they are under a heightened duty of supervision and cannot rely on the same standards as those without such knowledge.

The case clarifies that when analysing what a director should have done hypothetically, the court must assume proper compliance with duty—it is no answer to show that the director would probably have acted differently, as that would allow one breach to excuse another.

The decision has significant implications for family-owned companies where one member dominates, emphasising that family loyalty cannot override fiduciary duties to the company.

Verdict: Appeal allowed. Zaurian Luqman declared liable to Lexi Holdings in the sum of £41,968,294 and Monuza Luqman declared liable in the sum of £36,968,988 as equitable compensation for their breaches of duty as directors.

Source: Lexi Holdings plc v Ruqman [2009] EWCA Civ 117