The corporate veil affords no protection to directors who have behaved fraudulently. However, as was made plain by a case concerning the frenzied market in the supply of face masks during the COVID-19 pandemic, there is a great difference between carelessness – even gross carelessness – and dishonesty.
A pharmaceutical packaging company (the buyer) agreed to purchase 400,000 face masks with a view to their onward sale to the NHS. The masks bore the mark and specification number of a reputable manufacturer. They later turned out to be counterfeit, however, and the NHS rejected them.
After the buyer launched a breach of contract claim, summary judgment was entered against the company from which it had purchased the masks (the seller) on the basis that it had no realistic prospect of successfully defending the claim. Damages in excess of £1.6 million, representing the entirety of the purchase price and warehousing costs, were awarded against the seller.
However, an issue also arose as to whether the seller's sole director should be held personally liable to satisfy the award. The buyer alleged that it had purchased the masks in reliance on his fraudulent representations as to their genuineness. It asserted that he had made statements without an honest belief in their truth, or recklessly, that is without caring whether they were true or false.
Ruling on the matter, the High Court noted that the director appeared to have taken no, or no substantial, steps to verify that the masks were genuine. He was grossly careless in that the steps he did take were wholly inadequate, and obviously so. However, the Court emphasised that, however negligent a person may be, he cannot be held liable for fraud provided that his belief is honest.
Dismissing the claim against the director, the Court noted that he may have been the victim of a fraud himself. After the genuineness of the masks came under suspicion, he did not behave as someone might have done had they committed a fraud, even by recklessness, and who had been or was about to be found out. His conduct was rather that of a man who honestly believed that the masks were genuine and was puzzled by the problem.