A spirited attempt by a company, controlled by a single director, to blame its auditors for not detecting fraud was recently rejected by the House of Lords.
The liquidator of the company brought a claim for damages on behalf of the company against the auditors for failing to detect the frauds carried out by its sole director.
The main issue was whether a director’s illegal acts and intentions could be imputed to the company. In this instance, all those concerned with the management of the company had knowledge of the fraud. Accordingly, awareness of the fraud was imputed to the company and the claim therefore failed on the basis that a claim cannot be brought which arises from one’s own criminal conduct.
Arguments that the claim should be allowed because of the public duty of the auditors to detect fraud and because the company was the ‘secondary victim’ of the fraud were also rejected.
The Lords’ decision was by a 3-2 majority, which suggests that in somewhat different circumstances the outcome might have been different. The auditors will no doubt be relieved and the creditors of the company are left to bear the loss.
Directors can, in certain circumstances, be made personally liable for the actions of the companies they direct and, where the company engages in fraudulent activity, the risk of personal liability for directors is high.