company assets

What to Do When a Director Misappropriates the Company’s Assets

The directors of a corporation are required to manage and/or supervise the management of the business and its affairs. The Board of Directors decides the general direction of the business, oversees the business operations, and decides corporate policy. As such, they exercise significant power and control within a corporation. As the corporation’s directing hands and minds, the directors enjoy significant control over its assets and funds. They manage the company’s bank accounts and undertake the sale and purchase of assets on its behalf. For this reason, the law imposes two types of duties upon Directors:

1.        A fiduciary duty where the director must act honestly, in good faith and in the corporation’s best interests; and

2.      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 the company’s 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.

 

How a Director Misappropriates Company’s 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.

 

How a Company Can Protect Itself From Asset Misappropriation By A Director

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.

 

What Remedies Are 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”).

Under the derivative action, a complainant may start, defend, or discontinue an action on the corporation’s behalf. Complainants often bring derivative actions to remedy the wrongs done to the corporation when the management refuses or fails to do so.

The complainant requires the leave of Court and must provide at least fourteen days’ notice to the corporation’s directors. The OBCA allows the Court to make any order it thinks fit, including ordering the director to pay the amounts directly to the shareholders or return the misappropriated assets. In appropriate cases, the Court may appoint an inspector to investigate the corporation’s affairs.

Through the derivative action, the complainant can bring a claim for breach of fiduciary duty and breach of contract against the thieving director. The criminal proceedings’ findings may help with a lawsuit for civil remedies against the thieving director.

Under their fiduciary duty, a company’s director must act honestly, in good faith and in the corporation’s best interest. They must not use the company’s funds for themselves or steal the company’s goods.

In a claim for a breach of fiduciary duty and breach of contract, the shareholders, on behalf of the company, can seek remedies such as monetary and non-monetary damages, removal of the thieving director and injunction.

Depending on the facts of the case, additional claims for fraud, fraudulent conveyance, unjust enrichment, and the tort of conversion may also be brought against the director for misappropriating the corporation’s assets.

 

How a Commercial Litigation Lawyer Can Help

A commercial litigation lawyer will review the facts of your case and advise on the most appropriate remedies. Their unique skills and experience with commercial law and the litigation process can maximize your chances of success.

Before filing a claim, the commercial litigation lawyer will send a demand letter to the director who misappropriated the corporation’s assets. In the demand letter, they will summarize the facts and your legal position and propose a resolution. You can demand damages, restitution and even the removal of the offending director.

You may also negotiate with the company and its management while going through the claims process. A lawyer can negotiate with the opposing party on your behalf to ensure that you only settle for your entitlements.

Adopting an alternative dispute resolution mechanism, such as mediation or arbitration, can be a good way to settle a dispute. Having a commercial litigation lawyer by your side during the alternative dispute resolution process can be helpful. They will explain the process, appear with you before the arbitrator or mediator and try to resolve the dispute on favourable terms.

Where all else fails, the complainant can prepare and serve their application or claim on the responding director. At the same time, they may continue to negotiate with the other side.

A commercial litigation lawyer is a trained legal professional with experience in navigating the legal system. They can help you at each stage of a commercial lawsuit to ensure your rights are protected throughout the litigation process.

Like many other legal proceedings in Ontario, losing a derivative action can result in paying some or most of the opposite party’s legal costs. Skillful legal representation may help you avoid legal costs and unfavourable results.

 

Conclusion

A company’s director is responsible for managing its business and affairs. For this reason, the director is expected to act in the business’s best interest. However, sometimes the directors put their own interests over that of the company by misappropriating its assets.

If the director(s) misappropriated the corporation’s assets, you should contact a commercial litigation lawyer immediately. They can help you bring a derivative action on behalf of the company to ensure that the corporation gets appropriate relief and that the director is held accountable for its actions.

 

Contact us

If you are a corporation or a shareholder and have been a victim of illegal, fraudulent or improper conduct by the corporation’s directors, our team of commercial litigation lawyers would be happy to help you navigate your matter.  Contact us at +1 (800) 771-7882 or email [email protected], and we would be happy to assist.

 

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