The ADGA Doctrine and Fraud by Corporate Directors and Officers
David Debenham*, CFI, Partner
The "ADGA doctrine" originates from a case called ADGA Systems International Ltd. v. Valcom Ltd. The following principles have been subsequently recognized as part of the ADGA doctrine: (a) that directors of a corporation may be personally responsible for the statutory obligations of their corporations, regardless of the directors' involvement, and (b) that if the director does some wrongful act, the director is personally liable for this wrongful act in tort, whether it was done within the scope of the director's employment or whether it was done bona fide in what was perceived as the best interests of the employer corporation. In WS Leasing Ltd. v. Platinum Equipment Ltd.,et al, two directors of the defendant company purported to sell 40 steel shipping containers through their company Platinum Equipment Ltd. The two directors took the position that the Plaintiff clearly contracted with their company, and that therefore their claim is restricted to one for breach of contract against their company. They were nevertheless found liable for fraud.
In WS Leasing, one of the directors picked up the cheque for the purchase price from the Plaintiff without advising that Platinum was not in a position to transfer any containers to it because some of the containers were not manufactured, and the ones that were manufactured had not been shipped from China, and had not been paid for by Platinum. Further, he did not disclose that the serial numbers on the NVIS forms used in the contractual documentation were from a prior transaction, and were for containers that were no longer available. In order to induce the payment of the purchase price, a second director showed the Plaintiff what purported was a shipping manifest and proof the containers were on their way. He also told the Plaintiff that the containers were being shipped on a vessel known as the Perth. When the Defendant corporation was unable to its contractual obligations because the 40 containers never arrived, the Plaintiff sued the corporate Defendant for breach of contract, and two of its directors for deceit. The Plaintiff succeeded on both counts.
In order to establish the tort of deceit the plaintiff must prove a fraudulent misrepresentation. In order for a representation to be fraudulent, the representation must be false, the party making the representation must have known it was false at the time it was made, or have made it with reckless disregard as to its truth, the victim must have been induced to act as a result of the representation, and the party making the representation must have intended the victim to act. In order for a representation to be reckless, there is no need for an intention to deceive. A wanton disregard as to whether or not the representation will deceive or not is sufficient. When a professional salesperson chooses to give answers to serious questions from potential purchasers without ascertaining whether or not they are true, recklessness and the tort of deceit are established. Liability can be imposed for remaining silent and allowing false statements to be made in one’s presence in circumstances where it is reasonable to believe that one’s silence is tantamount to acceptance of the statement. In this case both of the directors led the Plaintiff to believe that the containers were in existence, and ready for delivery, when they knew this was not true. They intentionally misled the Plaintiff in order to secure payment of the purchase price of the containers to their company. The ADGA doctrine confirms that while these actions were taken to advance the interests of their company, and not for their own personal advantage, these directors are still personally liable for their deceit. The proper award for fraudulent misrepresentation is to place the innocent party in the position it would have been in but for the fraudulent misrepresentation. In this case, that means that the directors had to pay the Plaintiff the full amount of the cheque they procured for their company, less any amounts recovered by the Plaintiff to date.
Investigators have to remember that the corporate veil is of no avail to fraudsters, and conduct their fraud investigations accordingly so that the individual perpetrators of the fraud do not escape responsibility for their misdeeds.
* David Debenham, CFI, is the author of Executive Liability and the Law, and The Law of Fraud and the Forensic Investigator (both from Carswells). He was the successful appellate counsel in ADGA v. Valcom.