Lexi Holdings Plc v Luqman & Ors

The claimant (“Lexi”) was incorporated in September 2000 and was engaged in the business of providing bridging finance for those seeking to acquire property. The funds with which to carry on that business were obtained from a syndicate of banks under progressively increased facilities. The managing director of Lexi was, from June 2001, Shaid Luqman (“Shaid”). His elder sister Zaurian Luqman (“Zaurian”) was the controlling shareholder and, until October 2003, the only other director of Lexi. On the latter date Shaid’s eldest sister Monuza Luqman (“Monuza”) was appointed an additional director of Lexi. In addition there were, from October 2003, other directors of Lexi who were not related to the Luqman family to whom I shall refer later.

Between 7th October 2002 and 15th November 2006 £59,607,498 of Lexi’s money was dishonestly misappropriated by Shaid via three bank accounts of Lexi, namely the Barclays Account, the Lloyds Account and the UNB Account in some 100 payments for the benefit of sixteen recipients including Shaid’s father Mohammed, his brother Waheed, Monuza and a number of companies owned or controlled by Shaid. On 5th October 2006 Lexi went into administration and two partners in KPMG were appointed the administrators.

These proceedings were commenced by Lexi on 13th November 2006. Lexi sought to recover from Shaid, Waheed, Monuza and Zaurian the money so misapplied, as well as other relief. Orders for the committal to prison of Shaid for his contempt were made by Henderson J on 2nd July and 19th October 2007. In addition Shaid was debarred from defending the action for breach of a number of orders. Consequently on 6th December 2007 Lexi obtained judgment against Shaid for £59,607,498 and interest thereon. Lexi’s application for summary judgment under CPR Rule 24.2 against Waheed, Monuza and Zaurian came before Briggs J in November 2007. By his order made on 23rd November 2007 Briggs J gave Lexi summary judgment on part of its claim against Waheed in the sum of £41,388,993 and interest. On 17th March 2008 a bankruptcy order was made against Waheed on his own petition. As against Monuza and Zaurian Briggs J declared that:

“By reason of their total inactivity while directors [Monuza and Zaurian] breached the fiduciary and common law duties of care which they owed to Lexi....and are liable to [Lexi] in damages and/or to compensate [Lexi] in equity in respect of any losses caused by such breaches of duty arising out of the transactions...”

Briggs J directed that there be a trial of the outstanding issues as between Lexi and Monuza and Zaurian.

The trial of those issues took place before Briggs J in June 2008. For the reasons explained in his judgment handed down on 16th July 2008 (hereafter referred to as [2]) Briggs J concluded that Monuza and Zaurian were not liable for the misappropriations by Shaid, except in relation to the sums paid to them, because, in effect, their inactivity as directors had not caused such misappropriations or any loss to Lexi in respect of them. Briggs J gave Lexi permission to appeal from his order dated 22nd July 2008 giving effect to that conclusion.

By its appellants’ notice issued on 12th August 2008 Lexi seeks orders that Monuza and Zaurian pay to Lexi as equitable compensation or damages the respective sums of £36,968,988 and £41,515,037 on the grounds that Briggs J was wrong to have concluded that such parts of the overall misappropriations of £59,607,498 had not been caused by their inactivity as directors as declared in his order made on 23rd November 2007. Neither Monuza nor Zaurian appeared at the hearing of the appeal on 27th January 2009. Accordingly the issues for our determination relate to the questions whether any and if so what part of the overall misappropriations of £59,607,498 claimed against Monuza and Zaurian respectively was caused by her inactivity as a director of Lexi. In order to approach those issues it is necessary to set out the facts and the judge’s conclusions in much greater detail.

Monuza, Zaurian, Shaid and Waheed are the children of Mohammed and Sharifan Luqman. They were born in 1966, 1967, 1968 and 1973 respectively. In 1993 Shaid was convicted on five counts of obtaining or attempting to obtain property by deception and was sentenced to imprisonment for 21 months. In September 1996 Shaid was publicly accused in the Manchester Evening News of responsibility for a rental advance and deposit fraud practised on students in Manchester. On 14th February 1997 Shaid was again convicted of attempting to obtain property by deception and sentenced to two years imprisonment. Documentary evidence drawn to our attention suggests that the Luqman family were close-knit in the sense that they lived together with their parents for longer than might have been expected. They pooled finances and held directorships of the same companies.

Lexi was incorporated under the name of Pearl Securities Ltd. It changed its name successively to Pearl Holdings (Europe) Ltd on 5^th September 2000 and on 9 November 2004 to its present name and was re-registered as a public company. Article 13.2 of its Articles of Association provided that the office of director should be vacated if the director, being an executive director, for whatever reason ceased to be employed by Lexi or any of its subsidiaries. It follows that it was open to the Board of Directors, as well as a majority of the shareholders, to remove Shaid, who was the managing director of Lexi, from the Board.

The issued share capital of Lexi was, at all times from its incorporation, registered in the name of Zaurian. Briggs J concluded that she was also the beneficial owner. At its incorporation Waheed was the sole director and the secretary of Lexi. On 11th June 2001 Waheed resigned from both offices and Shaid and Zaurian were appointed directors, Zaurian was appointed secretary. On 14th October 2003 Monuza and Malcolm Davis were appointed additional directors. Mr Davis had had many years experience in the corporate lending work of a succession of banks. Just over a year later, on 15th November 2004 Mr Richard Jewson and Mr Norman Hill were appointed additional directors of Lexi. Mr Jewson had had considerable experience as a director and chairman of a number of public companies engaged in a variety of businesses, including Savills plc. Mr Hill became responsible for the day to day administration of Lexi. All the directors, except Mr Hill, resigned on various dates in 2006, Mr Davis on 24th February, Mr Jewson on 24th April and Monuza, Zaurian and Shaid on 5th October on the appointment of the administrators.

The finance for the business of Lexi came from Barclays and subsequently a syndicate of banks, of which Barclays was the agent, under successive facility agreements. They provided for revolving credits of varying amounts. The first dated 29th November 2001 provided £2.5m, the amended facility agreement dated 15th April 2002 increased the limit to £5m and successive amendments increased the limit to £20m on 4th October 2002, £50m on 4th July 2003, £100m on 2nd April 2004 and £120m on 27th July 2005. It was a condition precedent to any draw-down of an increased facility that the last published accounts should be unqualified. The facility was secured by a fixed and floating charge over all the assets of Lexi. In addition it required that there be a designated receipts account into which the receipts of its business would be paid and there applied to reduce the indebtedness of Lexi to the banks. Restrictions were imposed on the ability of Lexi to dispose of its assets or incur indebtedness.

The designated receipts account was an account at Barclays. This is the first of the three bank accounts by means of which the misappropriations of which Lexi complains were made. The second (“the Lloyds Account”) was an account with Lloyds TSB opened by Shaid in January 2002 and closed in June 2005 when the third account (“the UNB Account”) was opened with United National Bank. Briggs J concluded that the UNB Account was an account of Lexi and opened in breach of various terms of the facility agreements, and that Lloyds Account was used to receive money beneficially belonging to the Company and in this respect should be treated as an account of the Company, see the judgment of Briggs J given on 16^th November 2007 (1[38 and [61]). see and [61]). Accordingly the payments out of each of those three accounts were payments of the money of Lexi.

During the period the misappropriations occurred the accounts of Lexi recorded a directors’ loan account (“the Directors’ Loan Account”) in the names of Shaid and Zaurian. In the year ended 31st December 2002 it was £4.6m. It increased to £22m in 2003 but went down to £17m in 2004. In his original defence Shaid claimed that this loan account recorded his investment in Lexi of some £62m less repayments from one or other of the Barclays, Lloyds or UNB accounts of £42m. Briggs J rejected the contentions of Shaid and others that his investment in Lexi was derived from family sources, inheritance or investors from Pakistan. He concluded (1/[64] to [81] and [199]) that the Loan Account was bogus in that the credit balance represented money of Lexi, not of Shaid or any other member of the Luqman family.

On 29th January 2004 the auditors of Lexi, Horwath Clark Whitehill, resigned. They prepared a statement of circumstances which they wished to bring to the attention of the members and creditors of Lexi as envisaged by s.391A Companies Act 1985. The statement related to the circumstances for the purposes of VAT of certain work to a cost of £830,155 carried out at 27 Willoughby Road, Hampstead, London. The auditors raised a number of questions with Shaid but did not believe that he had given satisfactory answers. Shaid prevented circulation of the statement to members or creditors by applying for an order under s.391A(6). The application was due to come before HH Judge Howarth, sitting as a deputy High Court Judge of the Chancery Division, on 24th October 2004 when it was abandoned. The judge, who had read the papers, in dealing with the application for costs made by the former auditors described the application as “wholly unmeritorious” and “as clear an abuse of the process of this court as it would be possible to find”. He referred the matter to the Crown Prosecution Service.

Following the judgment of HH Judge Howarth, the former auditors of Lexi sent a copy of the Statement of Circumstances to Barclays as the agent for the bank creditors on 12th November 2004. In December 2004 Barclays instructed KPMG to review a sample of 50 loans on the loan book of Lexi and to review the new work it was undertaking. The review was inhibited by Shaid refusing them access to the offices of Lexi in January 2005, ostensibly because he did not agree with the prospective charge of KPMG for doing the work. KPMG nevertheless expressed their findings in a series of reports and meetings in January and February 2005 that, as summarised by Briggs J in paragraph [130] of his judgment given on 16th July 2008 (2/[130):

“if the syndicate chose to enforce its rights by appointing receivers or administrators, the incoming office-holders would find [it] very difficult adequately to enforce Lexi's rights against its borrowers, those being the principal rights to which the lending syndicate would need to have recourse in making a significant recovery. Furthermore...that, in flagrant breach of its obligations under the Facility Agreement, Lexi had been lending not merely on short-term bridging loans, but on an extended basis, to fund speculative property transactions and developments.”

As I have already recorded, Mr Davis resigned as a director on 24th February 2006 and Mr Jewson on 27th April in the same year. On 4th October 2006 Patten J made orders disqualifying both Shaid and Waheed from acting as directors of a company for the maximum period of 15 years because of their conduct in relation to the affairs of Modern Living UK Ltd which went into receivership in May 2001 and was subsequently wound up. Lexi went into administration on 5th October 2006 and Mr Fleming and Mr Green, partners in KPMG, were appointed administrators.

I have already sufficiently referred to the commencement of this action and some of the subsequent proceedings. Points of claim were served by Lexi pursuant to the order of Briggs J made on 23rd November 2007. In paragraph 5 Lexi claimed that had Monuza and Zaurian each fulfilled their fiduciary duties and common law duties as directors of Lexi the losses arising from the breaches of duty and misappropriations of Shaid on which Lexi relied would have been prevented or would not have occurred. Lexi then set out in considerable detail what Zaurian and Monuza knew or ought to have known, what, with such knowledge, they could and should have done and what would or would not have happened if they had done so. The knowledge of Zaurian and Monuza, actual or constructive, on which Lexi relied are (1) Shaid’s previous convictions and bad character, (2) the fictitious Director’s Loan Account, (3) misuse of the funds of Lexi in the UNB Account, (4) misuse of the funds of Lexi in the Lloyds Account, (5) loans made in breach of s.330 Companies Act 1985 to Imaan Incorporated and Serton International Corporation SA, (6) sales of property to companies controlled by Shaid in breach of s.320 Companies Act 1985. Briggs J dealt with these allegations in detail in his judgment handed down on 16th July 2008. I need not deal with them in any greater detail at this stage.

The issues of causation as between Lexi on the one hand and Monuza and Zaurian on the other were heard by Briggs J on and between 10th and 19th June 2008. Monuza and Zaurian were then represented by leading and junior counsel. Evidence for Lexi included the witness statements of Mr Gresham, a director in the Business Support Department of Barclays Bank plc, who, from December 2004 to March 2006, had the day to day conduct of the account of Lexi with the syndicate of banks, Mr Jewson and Mr Green. Each of them was cross-examined. In addition Lexi put before the judge statements of Mr Davis and Mr Green but as neither was available for cross-examination he declined to place any weight on either of them. Zaurian refused to submit to cross-examination on her witness statement. Monuza did but was described by Briggs J as “a most unsatisfactory witness”. Thus, in effect, the only evidence at the trial was that adduced by Lexi.

The judge summarised the issues and previous proceedings 2/[1] to 2/[12]. He explained why he considered it to be necessary to approach the evidence for Lexi with caution particularly with regard to assertions of hypotheses 2/[14]. He considered that Mr Gresham was an honest helpful and generally reliable witness 2/[16]. He found Mr Jewson to be wholly reliable on matters of fact and persuasive with regard to hypotheses 2/[19]. The judge thought that Mr Green was a reliable witness of fact and that his opinions on the various hypotheses commanded careful attention. But he also considered that Mr Green put loyalty to his firm’s client, Barclays Bank plc, before his duty of complete frankness to the court 2/[20].

In paragraphs 2/[28] to 2/[39] Briggs J analysed the principles of causation and the duties of directors and standards to be expected of them. He pointed out that the standards to be expected of directors involved both an objective and a subjective test 2/[37]:

“The objective test sets the basic standard. It is no excuse for a director to say that, in fact, she did not have the general knowledge, skill or experience reasonably to be expected of a person carrying out her appointed functions. The subjective test potentially raises the standard by reference to any greater general knowledge, skill or experience which the particular director actually has.”

In relation to the issue of causation Briggs J pointed out that 2/[40]:

“The first stage in the causation analysis is therefore to ascertain what steps, relevant to the preservation of Lexi's assets from fraud by their brother, each of Monuza and Zaurian would have taken, had they complied with those duties to the requisite standard, rather than adopted an attitude of total inactivity. For that purpose, the court does not assume a bare minimum compliance on the one hand, or an ideal compliance on the other. The question is simply one of probability.”

Briggs J concluded that the subjective standard did not apply 2/[41] so as to attribute to either Monuza or Zaurian any higher standard than the normal objective standard and that in relation to the custody of the company’s assets and the prevention of fraud their role was essentially supervisory 2/[42]. Briggs J considered at the outset a point of general application to the various points he had to decide, namely the capacity in which Zaurian held the issued share capital of Lexi. He concluded that 2/[48]:

“...the oral evidence did not displace the clear indication to be derived from the documents that Zaurian was the beneficial owner of the Lexi shares. Nonetheless the effect of the evidence, taken as a whole, was that Shaid was so clearly the dominant family member in relation to Lexi that his domination must also have extended, as a matter of family understanding, to Zaurian's exercise of her rights as shareholder. In other words, although on any particular day Zaurian was the beneficial owner, I have no doubt that, if asked by Shaid to do so, she would readily have transferred the shares to him, or to some other member of the family, or exercised her rights as shareholder at his bidding.”

In paragraphs 2/[51] to 2/[59] Briggs J dealt with the case for Lexi based on the bad character of Shaid. He considered 2/[53] that the admissions of Monuza and Zaurian as to their knowledge of his criminal convictions to be such as should give rise to serious apprehensions as to whether Shaid should be entrusted with the management of a substantial business unless subjected to the most rigorous scrutiny and supervision. He concluded 2/[55] that Monuza and Zaurian:

“should have informed their fellow directors on Lexi's board of what they knew about Shaid's criminal convictions in the 1990s, if they were not personally to supervise Shaid's day to day conduct of the company's affairs. They had no reason to suppose that their fellow directors knew the relevant facts. It was special knowledge which, despite their family ties, their duty to Lexi required them to communicate to their colleagues on the board.”

Briggs J rejected 2/[57] the submissions that Monuza and Zaurian should have gone further and either prevented Shaid becoming a director of Lexi, operating the bank accounts, disposing of assets or contracting on behalf of Lexi. He considered that any such course was impractical because it was likely to lead to their own removal. Similarly he rejected 2/[59] the submission that they ought to have informed Barclays. He considered that had Monuza and Zaurian been concerned to discharge their duties as directors the reasonable and probable response would have been to inform their fellow directors and seek their advice as to what to do 2/[57].

In paragraphs 2/[60] to 2/[70] Briggs J considered the duties of Monuza and Zaurian in relation to the Directors’ Loan Account which, in his first judgment, he had concluded to be fictitious 1/[81]. He accepted 2/[62] that their duties required them to apprise themselves of the basic outline of the business of Lexi and that in doing so Shaid would have told them that it was supported by “a loan account of his”. He also accepted 2/[63] that their knowledge of their family would have indicated to them that the scale of support thereby derived must have come from outside the family. This would have required them to ask searching questions of Shaid. In those circumstances Briggs J considered 2/[64] that:

“The question therefore arises whether on the balance of probabilities Shaid would have been able to persuade them to their reasonable satisfaction that the loan account was legitimate.”

The judge answered that question 2/[68] in the affirmative but then posed another:

“The critical question is whether he would have satisfied them to such an extent that it would not have been reasonably incumbent upon them to raise the matter with their colleagues on Lexi's board, who would of course have recognised that Shaid had given two substantially different explanations as to the source of his investment in the company, both of which could not simultaneously be true.”

Briggs J answered that question in the affirmative too. He said 2/[69]:

“I am not persuaded that, after Shaid's best endeavours to deal with any concerns expressed by his sisters about the loan account, they would still have been left in sufficient doubt as to require them to refer the matter to their colleagues. One thing that emerges from the sorry account of Lexi's affairs with complete clarity, is that Shaid was a persuasive, sophisticated, charming and highly intelligent liar. On that issue, Mr Jewson's and Mr Gresham's evidence was in unison. Furthermore, the fact that Shaid was able to talk his way out of the tight corner constituted by having his misconduct in and before 2004, by then the subject of grave judicial findings, reported to Barclays by Lexi's former auditors (as I shall describe in more detail in due course) speaks for itself. By comparison with the difficulties which he successfully evaded on that occasion, satisfying his sisters as to the genuineness of his loan account would in my judgment have been for him a relatively easy task.”

On that basis, it followed that, in the judge’s words, 2/[70] Monuza and Zaurian would, without breach of duty, “have been fobbed off by lies from Shaid”.

The judge considered the misuse of funds from the UNB account in paragraphs 2/[71] to 2/[78] and from the Lloyds Account in paragraph 2/[79]. He concluded 2/[76] that Zaurian knew that the UNB Account was an account of Lexi and 2/[79] both Monuza and Zaurian knew that the Lloyds Account was a Lexi Account. But he rejected the contentions of Lexi that each of them should have realised that the existence of those accounts involved a breach of the terms of the various Facility Letters. In this respect he was impressed 2/[74] by the fact that Mr Jewson with all his experience had not looked at it carefully either. Nor did the judge accept that Monuza and Zaurian ought to have monitored the operation of either account. In both respects he considered that they were entitled to rely on Mr Davis. He also found that even if they had discovered any of the various misapplications on which Lexi relied Shaid would have satisfied them with some false explanation.

In paragraphs 2/[80] to 2/[82] the judge dealt with the unlawful loans to Imaan and Serton in January/February 2004 and October 2005 respectively. He set out the contentions of Lexi that both Monuza and Zaurian knew that both companies were beneficially owned by Shaid. He noted that there was documentary evidence that Zaurian knew of Shaid’s ownership of Imaan and that Monuza knew of his ownership of Serton. He accepted that they should have familiarised themselves with Lexi’s loan book of which even a cursory study would have revealed the loans in question. He considered that due performance of their duties as directors would have required them to inform the other members of the Board, but not Barclays or the police.

In paragraphs 2/[83] to 2/[85] Briggs J considered Lexi’s case against Monuza and Zaurian based on sales of property to four companies beneficially owned by Shaid in contravention of s.320 Companies Act 1985. He concluded that they knew of Shaid’s beneficial ownership of at least two of the four companies in question and therefore should have known that, absent shareholder consent, the sale or other dispositions of which they also knew were voidable. He considered that that would have required a discussion at Board level.

The judge summarised his conclusions as to what Monuza and Zaurian should have done in paragraph 2/[86] in the following terms:

“The outcome of this necessarily lengthy analysis is, in my judgment, that due compliance with their duties as directors in relation to the matters alleged would have required Monuza and Zaurian to raise with their colleagues on Lexi's board first, Shaid's previous convictions , as matters critically relevant to the need for his supervision, and secondly, some loans and transactions with connected companies which suggested contraventions of section 330 and 320. I am not persuaded that Monuza and Zaurian's duties to Lexi required them to report any of those matters to Barclays, or its advisers, still less to the police. I can see no reason why a reasonable appreciation of Lexi's best interests would have required any of those additional steps to be taken.”

Briggs J headed the lengthy section of his judgment from paragraph 2/[87] to paragraph 2/[153] “What then?”. What followed was a closely reasoned analysis of the possible consequences. It is helpful before considering the submissions for Lexi on this appeal to identify the particular conclusions of Briggs J and his reasons for them. The first stage was to consider what would have happened if Monuza and Zaurian had reported to the Board the various matters he concluded that they should have done. He thought that Shaid’s previous convictions was the most important of those matters. In paragraphs 2/[89] to 2/[113] Briggs J considered what would have happened if they had reported Shaid’s convictions to the other members of the Board as and when they were appointed. He considered, in summary, that the directors would have resigned but that, before doing so, they would have informed the auditors of their concerns, the auditors would have included some reference to them in the statement of circumstances which would, eventually, come to the attention of Barclays.

Briggs J concluded in paragraph 2/[113]:

“....at the end of a necessarily long and tortuous analysis, that if Monuza or Zaurian had complied with their duty to inform their fellow directors of Shaid's previous convictions, those would probably have come to the attention of Barclays in mid-November 2004, but probably not earlier.”

In paragraphs 2/[114] and 2/[115] Briggs J repeated the process in relation to the unlawful loans and property transfers. He concluded, in effect, that they added nothing because in the case of the loan to Imaan investigation of its terms might have led the Board to think it was acceptable and in the case of all the others they occurred after the date on which, if the other directors had been told of Shaid’s convictions, they would have resigned.

In those circumstances Briggs J headed the next section of his judgment, by way of continuation of paragraph 2/[113] “What would Barclays have done?”. This section runs from paragraph 2/[116] to 2/[153]. The conclusion in paragraph [153] was:

“There is always a risk that the complexity of a causation analysis may lead to an inability to see the wood for the trees. It is therefore necessary to stand back and check whether the outcome of the detailed analysis makes sense against the broader picture. In the present case I have recognised that a superficial view might lead to a conclusion that Shaid's fraud would somehow have been stopped once those with the requisite power learned that Judge Howarth's findings related to a man with an alleged criminal record. Looking at the matter in the round however, I consider that the principal feature in the landscape is the undoubted fact that, with the full benefit of those findings, revealing as they did a fraudulent concealment by Shaid of which the bank lenders were the intended victims, Barclays nonetheless concluded that its interests favoured the cooperative approach, even to the point of buying out its dissentient syndicate member. The administrators' success in recoveries to date, together with the large benefit of the Ten Acre charge, by no means suggests that Barclays was wrong to conclude that its own best interests would not be served by early intervention. In that context, an allegation reaching Barclays via Lexi's former auditors that Shaid had previous convictions would in my judgment probably not have been enough to change the course of history.”

As that conclusion indicates there were a number of steps in the analysis which, at this stage, I should identify. The first is the recognition in paragraph 2/[116] that when in January 2005 Barclays did become aware of breaches in the Facility Agreement entitling them to demand immediate repayment they did not do so but chose to adopt a co-operative approach with Shaid and left him in unsupervised control of Lexi until the administrators were appointed in October 2006. The judge then considered 2/[117] to 2/[125] why Barclays had adopted that approach notwithstanding the comments of HH Judge Howarth. He noted 2/[126] that they had not even consulted the other directors of Lexi. Had they done so 2/[126] the directors would have become aware, which they were not, of the strictures of HH Judge Howarth and what preceded them. In paragraph 2/[127] he noted that Barclays did not seek comfort from the new auditors. Instead 2/[131] Barclays adopted the co-operative approach rather than the enforcement route, as explained by KPMG in their reports. This was reinforced by the offer of Shaid to provide the Ten Acre charge worth some £30m as further security for Lexi’s borrowings 2/[135], but not altered by the opposition of one of the members of the syndicate, Lloyds TSB 2/[138].

In paragraphs 2/[140] and 2/[147] the judge considered whether Barclays would have acted any differently if they had been apprised of Shaid’s criminal convictions and the infringements of ss.320 and 330 Companies Act 1985 at or before becoming aware of the comments of HH Judge Howarth and the reports of KPMG. Importantly he concluded 2/[140(1)] that had Barclays been aware of Shaid’s previous convictions at an earlier stage the facility would not thereafter have been increased but the co-operative approach would still have been adopted in regard to the recovery of loans already made. He did not think 2/[142] that knowledge of the infringements of ss.320 and 330 would have added anything. He concluded that disclosure of Shaid’s previous convictions would not have led to any different outcome.

Briggs J considered 2/[148] the likely consequences had Monuza and Zaurian reported the occurrence of the further unlawful loans and property transactions effected after October 2005. He concluded that it would have made no difference either 2/[149]. Finally he recognised the possibility that some or all the disclosures Monuza and Zaurian ought to have made might have led Barclays to temper its co-operative approach with the imposition of more stringent conditions. He concluded 2/[150] that such a consequence had not been formulated or proved. The final result, as he stated in paragraph 2/[151] was:

“...that Lexi's case that Monuza and Zaurian's undoubted breaches of duty caused Lexi the loss primarily occasioned to it by Shaid's fraud, together with his brother Waheed's assistance, wholly fails.”

Counsel for Lexi did not dispute the analysis of Briggs J concerning the duty of directors or the need to prove causation in the sense that damage as claimed should be attributable to the breaches of duty relied on. But he did introduce two qualifications. The first related to the duty of directors, the second to the proof of causation.

In relation to the duty of a director counsel accepted that the judge rightly referred in paragraphs [31] to [[34] to the judgment of Parker J in Re Barings No 5 [1999] 1 BCLC 433 and of the Court of Appeal in Re Westmid Packing Services Ltd [1988] 2 BCLC 646 in relation to the duties of directors to safeguard the assets of the company and for that purpose to take reasonable steps to prevent and detect fraud and other irregularities. But counsel relies on and emphasises other passages in Re Westmid Packing Services Ltd [ibid] at p.653c and 654g to the effect that it is in itself a breach of duty by the remaining directors to allow themselves to be dominated or bamboozled by one of their number. Thus in the first of those passages Lord Woolf MR giving the judgment of the court said:

“A proper degree of delegation and division of responsibility is of course permissible, and often necessary, but total abrogation of responsibility is not. A board of directors must not permit one individual to dominate them and use them, as Mr Griffiths plainly did in this case. Mr Davis commented that the appellants' contention (in their affidavits) that Mr Griffiths was the person who must carry the whole blame was itself a depressing failure, even then, to acknowledge the nature of a director's responsibility. There is a good deal of force in that point.”

Lord Woolf MR reiterated the point on the following page where he added:

“(1)

It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities. The appellants may have been dazzled, manipulated and deceived by Mr Griffiths but they were in breach of their own duties in allowing this to happen. They can count themselves fortunate to have received the minimum period of disqualification and to have had the benefit of immediate orders under s 17 of the Act.”

As will be seen, it is the submission of counsel for Lexi that in a number of passages Briggs J used the ability of Shaid to deceive his sisters and other co-directors as a factor in their exculpation rather than as a further breach of duty on their part.

The qualification in relation to proof of causation counsel seeks to emphasise relates to the need to distinguish in relation to any particular link in the chain what, consistently with his duty as a director or auditor, a person should have done and what, in all probability, he would have done. He submits that if consistently with his duty to the company, whether as director or auditor, a person should have performed a particular action then he is liable for the consequences of not doing it. It is no answer to prove that he would have done something else for that would be to enable one breach of duty to be used to excuse another. If, hypothetically, a director should have done something then it is no answer to prove that in all probability he would have done something different. I would accept that submission in the abstract; it remains to be seen if it is susceptible of being applied in relation to any part of the judgment of Briggs J.

Counsel for Lexi focussed on specific links in the chain of causation considered by Briggs J for the purpose of demonstrating that he should have concluded that both Monuza and Zaurian are liable for at least parts of the overall sum of £59,607,498 for which Shaid is liable. The respective amounts for which it is alleged that they are liable are £36,968,988 and £41,515,037. These appear to be the aggregate amounts of the misapplications from the Baclays, Lloyds or UNB Accounts made after their respective appointments as directors.

The first link in the chain is the knowledge of Zaurian and Monuza when each of them was appointed to the Board of Lexi and the knowledge which was or, if they had performed their duties as directors, should have been subsequently acquired. The judge concluded that each of them knew, at all material times, of Shaid’s convictions. He also concluded that each of them knew of at least one of the unlawful loans made to Imaan in January 2004 or Serton in October 2005. Counsel for Lexi submits that the judge ought to have concluded that knowledge of the fictitious Directors’ Loan Account should be attributed to them as well because, had they done their duty as directors they would have known that it was fictitious.

As counsel points out the Directors’ Loan Account was referred to in the audited accounts of Lexi for the years ended 31st December 2003 and 2004. The accounts record that the transactions on that account were made with both Shaid and Zaurian. The balance on the account was shown as at the year end as £4.6m in 2002, £22m in 2003 and £17.9m in 2004. As the judge concluded both Zaurian and Monuza knew that the means of the Luqman family could not have extended to those amounts.

Briggs J concluded that Shaid would have succeeded in satisfying his sisters with some explanation for the loan account largely by reference to his ability at a later stage to do so in relation to Mr Jewson and Mr Gresham 2/[69]. This, counsel for Lexi contends, was a false comparison. Monuza and Zaurian knew, which Mr Jewson and Mr Gresham did not, of Shaid’s convictions for dishonesty and the extent of the means of the Luqman family.

Counsel for Lexi drew our attention to passages in the witness statements of each of Mr Jewson and Mr Gresham. In paragraph 13 of the witness statement of Mr Jewson made on 13th May 2008 he confirms that he was unaware of Shaid’s convictions until after Lexi went into administration. He was not told of them by Monuza or Zaurian and was horrified. He stated that had he been aware of them at any time during his directorship of Lexi he would have sought legal advice and subject to that advice would have summoned a meeting of all the directors in order to obtain the removal of Shaid as a director and managing director and the revocation of any mandate or authority he might have to deal with the accounts or assets of Lexi. Further, and again subject to legal advice, he would have brought the matter to the attention of the auditors and Barclays. Only if the board was not prepared to take any such action would he have resigned. Briggs J accepted 2/[93] that that evidence was to be qualified by his answers given in cross-examination to which the judge referred in 2/[91] to 2/[93] but that qualification does not go to the falsity or otherwise of the comparison the judge made between the conduct of Mr Jewson with his limited knowledge, on the one hand, and the more extensive knowledge possessed or to be attributed to Monuza and Zaurian on the other.

Mr Gresham was not a director but was responsible on behalf of the syndicate of lenders to Lexi for the operation of that loan facility. He was unaware of the convictions. He had no doubt that had Barclays been told of them they would not have agreed to any of the increases in the amount of the facility and would probably have demanded the immediate removal of Shaid as a condition for granting any further indulgence to Lexi.

In the light of that evidence I would accept the submission that the absolution of Monuza and Zaurian in relation to the Directors’ Loan Account by reference to the ability of Shaid to satisfy Mr Jewson and Mr Gresham is unjustified. Monuza and Zaurian knew of the convictions. They ought to have known that the Directors’ Loan Account as shown in the accounts required convincing explanation. Their duty as directors required them to be on their guard in relation to any explanations from Shaid in response to “the searching questions” the judge considered that they should have directed to him about the Directors’ Loan Account. Had they done their duty Shaid could not have satisfied them that the Directors’ Loan Account was genuine.

Counsel performed the same operation on the facility letters and the misapplications from the Lloyds and UNB accounts. Briggs J concluded that it was not the duty of either Monuza or Zaurian to examine the Facility Letter in order to ensure that Lexi complied with its conditions. He did so in part 2/[74] because Mr Jewson did not examine the Facility Letters either. Similarly in relation to the misapplications from the Lloyds and UNB accounts Briggs J considered that it was not the duty of Zaurian or Monuza to examine the bank statements for those accounts in part because 2/[78] Mr Jewson did not regard himself as under any obligation to do so.

Counsel submits that both those comparisons are false also. Mr Jewson did not know of the convictions of Shaid, the means of the Luqman family, nor of the fictitious Directors’ Loan Account. Monuza and Zaurian did. In addition Monuza and Imaan, a company of which Zaurian was secretary, received money from the Lloyds Account and Zaurian was a signatory of the UNB Account. These additional facts, known to them, should have led them at least to look at the accounts and question Shaid about them.

I have concluded that both Zaurian and Monuza ought to have known of the fictitious Directors’ Loan Account in addition to their knowledge of the convictions of Shaid. This is not a combination that Briggs J ever considered. Having concluded 2/[70] that the submissions of Lexi produced a “nil return” he never subsequently considered the issues of causation on the alternative hypothesis that had they performed their duties they would have known about it. In this respect the Directors’ Loan Account differs from the unlawful loans and property transfers, see 2/[114] and 2/[148]. It also differs from the unlawful loans and property transfers in that the Directors’ Loan Account was in existence and operation in the years ended 31st December 2002, 2003 and 2004. Accordingly any action it called for from Zaurian or Monuza was required at or shortly after the inception of their directorships.

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. The Directors’ Loan Account was in the name of Zaurian as well as of Shaid. She ought to have known of it shortly after her appointment as a director on 11th June 2001. Zaurian could not, consistently with her duty as a director, do nothing. It is not suggested that she should have used her voting power as the only member to remove Shaid at an Extraordinary Meeting of Lexi. Nor as one of only two directors could she remove him from his executive and board position under Article 13.2 of Lexi’s Articles of Association unless she was the chairman and had a casting vote. But she could and should have sought advice and informed the auditors, then Horwarth Clark Whitehill, and Monuza and Mr Davis as and when they were appointed on 14th October 2003.

Had Zaurian informed the auditors they could not have provided unqualified accounts with the consequence that the increased facilities agreed on and after 15th April 2002 would not have been granted. It would follow that the subsequent misapplications could not have been perpetrated. As the misapplications claimed against Zaurian started on 7th October 2002 she is, in my view, liable for all of them. For that reason alone I would allow the appeal from that part of the order of Briggs J made on 22nd July 2008 as impliedly dismissed Lexi’s claim made in paragraphs 4 to 5C in the prayer for relief contained in its re x 7 amended Particulars of Claim against Zaurian and in lieu declare her to be liable for the full amount claimed against her of £41,968,294.

Had Zaurian performed her duty as a director of Lexi when and in the manner that she should have done it is probable that Lexi would have gone out of business before Monuza and Mr Davis were appointed as directors on 14th October 2003. But not having done so then and Lexi continuing in business, it was the duty of Zaurian to inform the incoming directors of what she knew or ought to have known, namely the convictions and the fact that the Directors’ Loan Account was fictitious. If Monuza had not known before that the Directors’ Loan Account was fictitious she ought to have known shortly after her appointment both from Zaurian and from performing her own duties as a director of Lexi.

At that stage there were four directors Shaid, Zaurian, Monuza and Mr Davis. The three last-named directors had the ability to remove Shaid from his positions of Managing Director and ordinary director under article 13.2 of Lexi’s Articles. Given both that power and the knowledge they are deemed to have had, proper performance of their duty must have involved the imposition of external controls on Shaid or his removal altogether so that, in either event, the subsequent misapplications would not have occurred.

The misapplications claimed against Monuza started three weeks after her appointment. That and the subsequent misapplications constitute the aggregate sum claimed against her, namely £36,968,988. In my view loss to that extent was caused by Monuza failing to perform her duty as a director of Lexi. Accordingly I would allow the appeal of Lexi from that part of the order of Briggs J made on 22nd July 2008 as impliedly dismissed Lexi’s claim made in paragraphs 4 to 5C in the prayer for relief contained in its re x 7 amended Particulars of Claim against Monuza and in lieu declare her to be liable for the full amount claimed against her of £36,968,988.

In these circumstances it is unnecessary to consider any further what the auditors or Barclays would have done in the various hypothetical circumstances postulated by the judge.

In summary therefore I would:

I would invite counsel for Lexi to consider the figures set out in paragraph 55 above to ensure that there is no double-counting with regard to the other amounts for which Monuza and Zaurian are already liable under other parts of the order of Briggs J made on 22nd July 2008. In my view consideration should also be given to whether some provision should be made in our order to make it clear that the amounts for which, if the other members of the Court agree with me, we declare Monuza and Zaurian to be liable, are the same as or included in the sums of £41,388,993 and £59,607,498 for which Waheed and Shaid were made liable by the orders of Briggs J made on 23rd November and 6th December 2007 respectively.

I agree.

I too agree.