UK: Directors' Duties In A Third Party Fraud

Last Updated: 31 October 2014
Article by Mary Erb

The High Court has recently held that two directors, who were taken in by a substantial fraud, were in breach of duty to the company.  This throws some interesting light on directors' duties, and is a reminder to directors of their potential personal liabilities where the company is defrauded by a third party (Group Seven Limited v Allied Investment Corporation Limited and others [2014] EWHC 2046 (Ch)).


The case involved a claim by Group Seven Limited for fraud in relation to a fantasy investment of €100 million.  One of the defendants alleged that the company's directors had breached their duties in falling for the scam, and should be in part liable for the company's loss.

Although this case was decided under Maltese law, the High Court's conclusion that two directors were in breach of duty is worthy of note.  Directors in this situation could face personal liability to the company for losses caused by fraud perpetrated by third parties.

Factual circumstances

In each case concerning an alleged failure to comply with directors' duties codified in the Companies Act 2006, the particular facts will be paramount.  In this case, a number of factors were relevant including:

  • the patent absurdity of the fraud perpetrated on the company (amongst other things, it promised returns of €1.3 billion on an investment of €100 million over a period of 13 months, and it was made out by the fraudsters to involve the Federal Reserve in Washington releasing Medium Term Notes at a discount of up to 20% from face value to special, 'selected' projects of which the Federal Reserve approved, thereby allowing the recipients to make an almost immediate profit (to be split with the Federal Reserve);
  • the level of secrecy that the fraudsters had encouraged, thereby closing off investigation into the preposterous nature of the 'investment' or the shadowy group of people who would be involved in the 'investment' – an unknown and credential-free "Tier 1" authorised trader of the Federal Reserve; an unknown and unheard of group called the 786 Group in Washington; the Committee of 300; the Illuminati; and finally a trading 'platform' operated by the Vatican and the Royal House of Aragon;
  • the credit of €100 million of the company's money to an account over which the company surrendered control and had no security, the purposes of which were deliberately concealed from the bank where the account was held and operated; and
  • the side-lining of the company's Chief Financial Officer from the decision making process, who reviewed initial proposals relating to the scheme and was extremely sceptical from the outset.

Directors' conduct

The court found that two directors, one of whom was also Group Legal Counsel, were in particular responsible for the company's entering into the fraudulent scheme.  Their conduct was heavily criticised, and the comments below give a flavour of the criticisms made by the judge:

"It is impossible to overstate the level of incompetence demonstrated by [the Group Legal Counsel's] evidence at this trial.  He did no checks on the background of these people trying to sell this transaction to him...He discovered nothing about the details of the transactions...He accepted without challenge anything they said.  Finally in October 2011 he signed away control of €100 million, despite being required never to agree anything like that...He took comfort from documents that were meaningless...If he were uncertain as to the law, he should have obtained advice from somebody else.  That is what one would expect of a senior in-house legal counsel who might have knowledge of generalities, but would not necessarily have knowledge of specifics.  It is plain that he had no idea what the investments were, but was content to accept the vague descriptions provided by the defendants and fell into the trap of believing in the secrecy of everything."

The two directors were, in the judge's view, "thoroughly taken in" rather than "dishonestly complicit" in the fraudulent scheme, and committed the Company's funds in a "ridiculous and reckless" way.  He concluded it was clear that they had been in breach of their duty as directors to exercise reasonable skill and care, but he did not think they had been in breach of their fiduciary duty.

Potential consequences for directors

Where a director has breached a fiduciary duty, he must restore the dissipated assets even if it is possible that the company would have suffered the same loss without the breach.  In contrast, as in this case, where a director has breached his duty to exercise reasonable care and skill, but not his fiduciary duties, the court will consider what may have happened without the director's breach, and whether the loss would still have occurred in any event.  The director may still be liable to compensate the company, to the extent that the loss suffered can be shown to have been caused by his breach.

In the case of a fraud perpetrated on the company by a third party, directors who have been shown to be in breach of their duty to exercise reasonable care and skill may still be liable for the whole amount of loss suffered by the company as a result of the fraud, despite the malevolent involvement of the fraudster.  In 2009, the Court of Appeal held in Lexi Holdings plc v Luqman that two non-executive directors who knew of another director's previous dishonest conduct, and did nothing about it, were liable to the company for the third director's fraud.  The reasoning was that the fraud could not have taken place but for the non-executive directors' failure to exercise reasonable care and skill. 

Closing considerations

The courts have acknowledged, in cases concerning directors' duties, that business activity undertaken by company directors necessarily involves a certain amount of risk and that too hard an attitude on the part of the courts to directors' conduct may reduce the appetite of directors for appointments, or 'chill' that risk taking business activity beyond a point which is healthy for a company.

It is therefore worth noting that a director may be protected from liability in the case of breach of duty by seeking relief from the court on the grounds that he acted honestly, reasonably and that it is fair in all circumstances of the case to relieve him of liability (in full or in part).  Another possible avenue to protect a director is the ratification by the company of his conduct, or the company may have in place a policy of D&O insurance which may cover the relevant liability.

This case illustrates that directors must be vigilant against the possibility of the company becoming a victim of fraud.  They may be in breach of duty (and risk personal liability to compensate the company) if the company is victim to fraud and they failed to spot a scam which a reasonably diligent person, with the general knowledge, skill and experience that would be expected of a director in their position (and the general knowledge, skill and experience that they actually have), would have spotted. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.