Lagunas Nitrate Co versus Lagunas Syndicate, (1889) 2 Ch. 392

Simply because they are the directors, does not mean that they are supposed to be held liable for every mistake that they are making in the course of their conduct. This is true even if the directors may have avoided the mistake altogether had they taken slightly more care of their actions.
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Introduction

The Court laid down the standard of care for a director of a company in an elaborate manner. The case discussed that directors discharge both their equitable and legal duty towards the company if directors act within their powers. Directors are expected to act with reasonable care while respecting their knowledge and experience. Additionally, the directors must act honestly for the benefit of the company they represent.

Facts

In this case , the defendant Lagunas Syndicate (hereinafter ‘syndicate’), purchased nitrate lands in Chili in 1889 for £ 110,000. The company purchased a part of this Nitrate land in 1894. The promoting directors of the company held positions of directors in syndicate. The directors signed the Company’s Memorandum and Articles of Association, concurrently listed as the directors of syndicate. They prepared the prospectus of the company and the contract of purchase. They also affixed seals of both the company and syndicate to these documents. The secretary and the solicitors of both the companies were the same. Two years after the contract of purchase, the shareholders of the company appointed an independent board of directors. The board investigated the purchase and brought an action against syndicate and directors. The action claimed rescission of the contract and damages for misrepresentation, misfeasance, breach of trust, and concealment of material facts.

Issues

Whether the company was entitled to damages or/and rescission?

Held

The Court held that the company was not entitled to the damages or rescission. The Court opined that the shareholders and Plaintiff Company were aware that the directors held position in both plaintiff and respondent company. This was public information and can be verified from the memorandum of association and the articles of association. The directors did not form an independent board. However, this could not be the basis to set aside contract and invoke the responsibility of directors .The Court also reasoned that the all material facts were disclosed to everyone at the time of the contract. Therefore, company was not entitled to rescission nor damages.

Analysis

The amount of care expected of a director is difficult of define because it differs from situation to situation. The court stated that directors of a company can’t be held liable for every action of the company. The court also noted however, that directors can avoid committing mistakes by following a minimal standard of care. The company failed to provide any material evidence to support the allegations. Additionally, it was evident that the company was aware of alleged hidden information, most of which was public information. Therefore, the court concluded that the company was not entitled to damages.

Conclusion

The Court held that the company was not entitled to the damages because the plaintiff failed to provide evidence. The directors made appropriate disclosures to both the companies as promoters and founders. The court concluded that the Syndicate did not engage in misconduct or misrepresentation. The plaintiffs knew the conduct and position of the directors in syndicate and the company since their incorporation.

Also Read  V. RAJARAMAN, LIQUIDATOR,GLOBE UNITED  ENGG & FOUNDARY Co. LTD.    Vs REGISTRAR OF COMPANIES (1974  44  CompCas 330 Delhi)

Directors may not be liable for their actions, if they make full disclosures. This, however, cannot deny the standard of care directors must ensure while engaging in multi-companies.

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