In the case of Njord Partners SMA-Seal LP & Ors v Astir Maritime Ltd & Ors [2024] EWHC 1682 (Comm), Muhammad Tahir Lakhani (“Tahir”), and his son Muhammad Ali Lakhani (“Ali”) were found liable in respect of false representations made to a lender to secure a USD 45 million loan to Astir, a company ultimately owned by them and another family member.

Background

The loan was allegedly required to support the family ship-recycling business during a downturn in trade and the market. It was intended to be used to buy vessels which could be sold to scrapyards to be broken down into parts. The loan was supported by guarantees from a parent company, various subsidiaries and Tahir personally. 

To secure the loan, Tahir provided the lenders with a statement of net worth which purported to show his personal assets were worth more than USD 46 million. To drawdown funds under the loan facility, the company had to comply with extensive conditions precedent, which included delivering an approved borrower statement confirming that funds would only be used for a permitted transaction (i.e. to buy and then sell the vessels or broker sales) and that there was no event of default. Once a permitted transaction had been completed, the company had to repay the amount drawdown within five business days after receipt of the sale proceeds. Failure to do so was an event of default. 

There were instances of default and the lender’s successors in title and security agent for the lenders (which had the benefit of the guarantees) issued a claim in the tort of deceit and conspiracy against the company, Tahir and Ali.

Admissions and Findings

Tahir and Ali admitted that false excuses were given as to why funding amounts in relation to particular transactions had not been repaid. It was also accepted that confirmations provided in approved borrower statements that transactions were permitted transactions and that there was no continuing default were false.

Finding of false representations

The lenders alleged Tahir and Ali made the following false representations fraudulently to deceive the lenders, causing loss:

1. Asset Representations: The description of Tahir’s assets in a ‘Statement of Net Worth’ was significantly overstated as some assets did not belong to Tahir or were of materially less value.
2. Delay Representations: Tahir gave a variety of excuses for the delay in repaying amounts drawn under the loan, including that the permitted transactions had not yet been completed when they had (which would cause a default under the loan). 
3. Approved Borrower Statement Representations: The confirmations made in the statements were false given Tahir and Ali knew they were in default because of the repayment delays. They were signed using Ali’s electronic signature.

The Court agreed and held that the representations were made in the knowledge they were false and that it was intended that the lender would rely on the statements to secure the loan. 

Deceit and Accessory Liability

Interestingly, Tahir admitted in a “disarmingly frank” manner that he had lied when making the Delay Representations. For the other representations, Tahir’s defence included denying that the lenders had relied on the representations or suffered any loss. The court observed Tahir’s tactic seemed to be to use his own liability to absolve his son. This was because Tahir was subject to an earlier related judgment and so there was “no downside” to him taking full responsibility. He was unsuccessful in this attempt. 

Ali was found to have made the Approved Borrower Statement Representations. Furthermore, Ali was found to have accessory liability for the false Asset Representations because he had helped in the preparation of the Statement of Net Worth, knowing what it was for, and was therefore a knowing and active party in a scheme to defraud. Ali had tried to minimise the extent of his involvement in the Statement of Net Worth, but his evidence was found to be untruthful. He had a “more than minimal part” in its preparation, knew its content was false, and knew the plan was to send it to the lender with the intention of them relying on it in deciding to make the loan. 

Conspiracy

Given its findings, the court decided that the requirements of the tort of unlawful means conspiracy between Tahir and Ali as against the lenders had been satisfied.

Implications for Lenders

For lenders, this judgment is a useful reminder of the fact that accessory liability can be used to broaden the scope of a claim to ensure all bad actors are captured by it. Here, a freezing injunction was obtained against Tahir and Ali, so outlining a claim for accessory liability could have helped convince the court there was also a substantive cause of action against Ali (a requirement of the injunction). Such an injunction is an invaluable tool in cases of this nature and provides the breathing room necessary to pursue difficult cases to their successful resolution. 

It also shows the benefits of well-developed conditions precedent when operating a revolving drawdown facility. Here, once lies were uncovered, the lenders could point to and rely upon clear breaches of terms in order to advance their claims. 

Implications for Borrowers

It is a cautionary tale for directors or others involved making representations to lenders for the purposes of securing financing. This case demonstrates that an individual may be jointly liable in deceit if they are a knowing and active party to a scheme to defraud, even if they have had more limited involvement and the actual representation has been made by someone else. 

Most readers will be comforted by the fact that they wouldn’t knowingly form part of a scheme. However, in the event a director finds him or herself as the sole dissenting voice in a boardroom with other directors looking to portray the company’s finances in an artificially favourable light, the judge’s comments on how he approached the evidence can be looked to for guidance on how to act. He specified that in cases involving misrepresentations and fraud, reference to the objective facts and documents will usually be a “better guide to the truth” than even the most confident recollections of the witnesses. 

So, record and document your dissents and disagreements at the time, rather than relying on your recollection at a later date. 

For discussion on the issues raised in this article, contact Leah Glover or Benjamin Smith.