Thursday, October 24, 2013

UK High Court Dismisses Liquidator’s Claims against Directors of Madoff Securities International

A U.K. High Court judge dismissed claims against directors of Madoff Securities International Ltd., the London business of Bernard Madoff, brought by the liquidator. Justice Popplewell said that Madoff Securities International Ltd. was not part of the Ponzi scheme. It was conducting its own legitimate business in London. The London directors had no reason to suspect Bernard Madoff's fraud, said the court, and none for a moment did so. In common with the rest of the financial world, they believed Bernard Madoff to be a man of unquestioned probity whose high reputation and status was justified by his apparently formidable history of financial trading and investment.

Among other things, the court held that the directors were reasonably entitled to believe, and did believe, that KPMG in its capacity as auditor and tax adviser were at all times fully aware of the nature of business activity of Madoff Securities International, Ltd. That directorial understanding about KPMG's knowledge and approval was a reasonable one is supported by a number of documents which suggest that the auditor was aware that the fees receivable were in part a subsidy, that the auditror approved the description of them as fees for services, and that the auditor knew that the value to be put on such "services" was a subjective one. Madoff Securities International (in liquidation) v. Raven, High Court of Justice, Queen’s Bench Division (Commercial), EWHC 3147, Oct. 18, 2013.

Discussing a director’s duty to act in good faith in the interests of the company, the Justice noted that a director owes a duty to the company to act in what he or she honestly considers to be the interests of the company. This may be regarded as the core duty of a director. It is a fiduciary duty because it is a duty of loyalty, said the court. The predominant interests to which the directors of a solvent company must have regard are the interests of the shareholders as a whole, present and future.

The duty is now codified in Section 172 (1) of the Companies Act in that a director of a company must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster the company's business relationships with suppliers, customers and others, the impact of the company's operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the company.

As expressed in the classic formulation by Lord Greene MR in Re Smith & Fawcett Ltd [1942], the duty is to act in what the director believes, not what the court believes, to be the interests of the company. The test is a subjective one.

A director has a duty by virtue of his office to exercise reasonable care skill and diligence. The duty is now codified in Section 174 of the Companies Act in that a director of a company must exercise reasonable care, skill and diligence, which means the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company and the general knowledge, skill and experience that the director has.

In these circumstances, the court concluded that the directors were not in breach of a duty to act in what they considered in good faith to be the interests of the company. The court found that the director Defendants were not in actionable breach of duty, and thus the remaining issues of remedy and causation did not arise.

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