Is a Director Able to Say “I Was Only Obeying Orders?”

directors and officers, D&O insurance, Bernie Madoff, Madoff Ponzi scheme

The English Commercial Court is about to re-engage with one of the many spin-off pieces of litigation arising from the collapse of the Madoff Ponzi scheme. The case in question is Madoff Securities International Limited (“MSIL”) v Raven and Others. It has already thrown up some interesting questions as is apparent from a judgment in 2011 following an earlier round in the same litigation presided over by Mr Justice Flaux. One issue of particular interest on the question of directors’ duties is the extent to which directors can rely upon the fact that a company has authorised, or to use the legal jargon; ratified, decisions taken at board level.

The Background

MSIL was a UK company 99% owned by Bernie Madoff with the remaining 1% shareholding being held by his brother, Peter. The supposed purpose of MSIL was to hold a seat on the London International Financial Futures Exchange (“LIFFE”). MSIL was in fact used to facilitate and conceal Mr Madoff’s fraud.

Proceedings were launched by MSIL’s liquidator against its directors who were Peter Madoff and his two sons. It was claimed against them that they should have realised that payments made by the company were in furtherance of a fraud and that they therefore were in breach of their fiduciary duties owed to the company. One of the questions which arose as a preliminary issue was whether this claim for breach of fiduciary duty was even arguable in circumstances where MSIL itself had authorised and approved (i.e. ratified) the conduct. The evidence was that Bernie Madoff as the majority owner of MSIL did not simply approve and authorise the relevant conduct but required MSIL to make the various payments.

The general rule is that ratification of a board’s decision is a complete defence to a claim by the company against its directors. Was there a broad enough exception to this rule under English law in circumstances where the company in question was being used as a vehicle for fraud or wrongdoing? The court decided that it was indeed arguable that the directors had breached their duties despite ratification by the company of the relevant payments.

The hearing which is due to commence at the end of this month will represent an opportunity to re visit and decide this important question (among several others). If the decision of Mr Justice Flaux is confirmed after full argument, it will be one more reason for directors to be cautious in the execution of their duties rather than just relying on the fact that the majority shareholder has authorised or ratified the relevant conduct.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers, Executive Risk

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