When a Corporate Director Misappropriates Company Assetsachkarlaw-admin
The directors of a corporation have a crucial role. They are responsible for overseeing and managing the company’s operations, setting its direction, and creating corporate policies. This means they have a lot of power and control in the company. As the ones in charge, they also have significant influence over company assets and finances. They handle things like managing the company’s bank accounts and making decisions about buying and selling assets. Because of this important role, the law imposes two types of duties on directors:
- A fiduciary duty where the director must act honestly, in good faith and in the corporation’s best interests; and
- A duty to exercise the care, diligence, and skill of a reasonably prudent person in similar circumstances.
A director who misuses their position of trust to misappropriate company assets breaches their fiduciary duty and duty of care owed to the corporation.
In this article, you will learn the common ways a director misappropriated a company’s assets and how a Corporation can protect itself from asset misappropriation. You will also learn your remedies against the directors who misappropriate assets and how a commercial litigation lawyer can help.
Methods of Director Misappropriation of Company Assets
When directors use their influence to misappropriate a corporation’s assets, they commit insider fraud. The stolen assets could be cash and cash equivalents, inventory, accounts receivable, intellectual property, company data and much more.
In a corporate setting, asset misappropriation usually occurs on a grand scale. For instance, a director who steals the company’s client list and sells it to competitors commits asset misappropriation. Another example is when a director transfers the company’s funds to their private bank accounts.
The most common forms of asset misappropriation by directors include:
● Invoice falsification;
● Making fraudulent claims for expenses;
● Payroll fraud;
● Intellectual property and data theft;
● Conversion of company property; and
● Transfer of the company’s funds into private accounts.
Ways to Prevent Director Misappropriation of Company Assets
Over the past few years, many companies have digitized their records entirely. They store the company’s information, documents, and data in a computer database. This rapid advance of businesses toward digitization has increased the risk of asset misappropriation.
A dishonest director with access to company networks can misappropriate digital assets with just one click. They may even use the company’s financial institution’s mobile application to transfer funds to their private account.
For this reason, companies must put some internal controls in place to protect themselves from asset theft.
A company may adopt the following methods to protect its assets from misappropriation:
● Carefully vet the directors before the appointment;
● Give incentives to employees for reporting fraud;
● Restrict access to sensitive information;
● Implement a whistleblowing policy;
● Regularly reconcile bank statements and other accounts;
● Confirm expenses to see if they are reasonable.
While the measures mentioned above can offer some protection against asset misappropriation, they cannot insulate against it. A company should have a clear response plan in place against asset theft.
One approach used by companies to prevent misappropriation is to appoint a chief legal officer (CLO) or general counsel to head their legal department. The CLO supervises the company’s in-house legal team and reports to its chief executive officer. They provide legal counsel to the company’s senior management regarding its legal and regulatory compliance.
A CLO provides comprehensive legal services to the corporation. They can help the company develop a corporate policy against asset misappropriation. They can ensure the corporate policy does not violate any existing privacy and employee monitoring laws.
Remedies Available For Misappropriation of Company Assets
Taking the company’s funds for one reason and using it for something else or keeping its assets without permission may constitute fraud. If a director misappropriates the company’s assets, the aggrieved persons can notify the authorities to investigate them for theft and fraud.
An aggrieved person may bring a civil action against the director for misappropriating the company’s assets. The most common claim against the directors for stealing the company’s funds are derivative actions under Ontario Business Corporations Act (“OBCA”) and the Canada Business Corporations Act (“CBCA”).
At Achkar Law, we understand the importance of safeguarding your company’s assets. If you suspect that a corporate director has misappropriated company resources, our experienced team of commercial litigation lawyers is here to help you protect your interests.