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Case-1 (Re City Equitable Fire Insurance Co)

The director of a company that collapsed due to bad investments and misappropriation of funds was convicted of fraud but later acquitted because the company's articles exempted directors from liability except for gross negligence. A second case found that a director was not liable for losses caused by a general manager and chairman providing fraudulent financial statements, as the director reasonably relied on them. A third case established that a director must disclose any personal interest that could reasonably influence their judgment, but non-disclosure of insignificant interests does not result in liability.

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118 views3 pages

Case-1 (Re City Equitable Fire Insurance Co)

The director of a company that collapsed due to bad investments and misappropriation of funds was convicted of fraud but later acquitted because the company's articles exempted directors from liability except for gross negligence. A second case found that a director was not liable for losses caused by a general manager and chairman providing fraudulent financial statements, as the director reasonably relied on them. A third case established that a director must disclose any personal interest that could reasonably influence their judgment, but non-disclosure of insignificant interests does not result in liability.

Uploaded by

Fouzia Kamal Sarker
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Case-1 (Re city Equitable Fire Insurance Co)

In this case the company collapsed due to bad investments, bad debts and bad misappropriation
caused by fraudulent acts of a director. The company suffered a loss of £ 2, 00,000 and
eventually was ordered to be wound up. The director was convicted for his fraud and negligence.
He was, however, acquitted in appeal because of an exception clause in the articles to hold
directors liable only for gross negligence.

ISSUE:

Whether the director is accountable for the loss of company according to law?

REASON:

Directors being a vital part of company have profound duties of care and skill towards the
company. In this case the collapse of the company was due to bad investments, bad debts and
misappropriation. He was accordingly convicted for his frauds. It was alleged that they were
guilty of negligence in not detecting the frauds. But there was an exemption clause in the articles
according to which the directors were liable only for gross negligence. In discharging these
duties a director must exercise some degree of skill and diligence. But he does not owe to his
company the duty to take all possible care or to act with best care. Indeed, he need not exhibit in
the performance of his duties a greater degree of skill than may reasonably be expected from a
person of his knowledge and experience. It is, therefore, perhaps, another way of stating the
same proposition that directors are not liable for mere errors of judgment.

DECISION:

So the director is not accountable for the loss and it is void according to law.
Case-2(Dovey vs Cory)

In this case a bank sustained heavy losses by advances made improperly to customers. The
irregular nature of advances was concealed by means of fraudulent balance sheets, which were
the work of the general manager and the chairman in assenting to payment of dividends out of
capital, and those advances on improper securities were done on the advice of the general
manager and chairman It was held that the reliance placed on the co-director by the general
manager and chairman was reasonable. He wasn’t negligent and was therefore not liable for not
having discovered the fraud as he wasn’t in the absence of circumstances of suspicion bound to
examine the company’s books to see if the balance sheet is correct. It may be said therefore that
the duties of care and skill appear to be negative duties

ISSUE:

Whether the director is liable for the loss of company according to law?

REASON:

In respect of all duties that, having regard to the exigencies of business, and the articles of
association, may properly be left to some other official, a director is, in the absence of grounds
for suspicion, justified in trusting that official to perform such duties honestly. This meant
directors escaped liability in instances where subordinates to whom they had properly delegated
functions relating to the company’s finances, misrepresented the company’s financial position
resulting in directors paying or recommending the payment of dividends out of capital.
According to the case, it is not always expected that director watch every other task of sub-
ordinate as business can’t be done without trusting people to the person who are kept as trustee.
So here director cannot be made accusable for trusting auditor as he had no reasonable ground to
suspect the honesty of other officials.

DECISION:

The director is not responsible for the loss because he had good faith so the reason is valid
according to law.
Case-3 (Re Coltness Iron Co Ltd)

It was held in the case of Coltness Iron Co that the interest to be disclosed is that which in
business sense might be regarded as influencing judgment; the essence of the matter being that
any kind of personal interest which is material in the sense of not be insignificant must be
revealed. The interest to be disclosed is that which in a business sense might be regarded as
influencing judgment the essence of the matter being that any kind of personal interest which is
material in the sense of not being insignificant must be revealed.

ISSUE:

Whether the director is liable for not revealing personal interest disclosure according to law?

REASON:

The interest to be disclosed is that which in a business sense might be regarded as influencing
judgment the essence of the matter being that any kind of personal interest which is material in
the sense of not being insignificant must be revealed. The director who has either a direct or an
indirect interest in a proposed transaction or arrangement with the company must declare the
‘nature and extent’ of that interest to the other directors, before the company enters into the
transaction or arrangement. A further declaration is required if this information later proves to
be, or becomes either incomplete or inaccurate. The requirement to make a disclosure also
applies where directors ‘ought reasonably to be aware of any such conflicting interest. However,
the requirement does not apply where the interest cannot reasonably be regarded as likely to give
rise to a conflict of interest, or where other directors are already aware (or 'ought reasonably to
be aware') of the interest.

DECISION:

The director is not liable for not disclosing personal interest that doesn’t influence in judgment
so it is valid according to law.

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