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

This Case establishes the point that acting as the director of any corporation does not make one liable for unforeseen mistakes or mistakes made while acting in the best interest of the firm. If a person undertakes an action believing it to be in the best interests of the firm, after exercising due diligence the action cannot be recorded as misrepresentation or breach of trust.
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Introduction

  • This case is one of the most well-decided cases of the company law. The court decided various important aspects related to companies act, 2013. The court laid down various standards that have to be followed by a person while acting as the director of any firm. 
  • This case also establishes the point that acting as the director of any corporation does not make you liable for unforeseen mistakes or mistakes made while acting in the best interest of the firm. 
  • A person could not be held liable for legal charges such as misrepresentation, breach of trust, and other such things if his decisions resulted in the loss of the other person, provided that those decisions were made with the positive intentions and good faith. 

Facts

  • In this case, the defendant Lagunas Syndicate (referred to as ‘syndicate’), bought nitrate lands in the territory of Chili in the year 1889 for a price of £ 110,000. The corporation bought a part of the Nitrate land in the year 1894. 
  • The promoting directors of the company also occupied the positions of directors in the syndicate. The directors duly signed the Company’s Memorandum of association and Articles of Association, simultaneously acting as the directors of syndicate. 
  • They arranged the prospectus of Lagunas Nitrate company and also made the contract of purchase. They also attached seals of both the Lagunas Nitrate company and syndicate to all these legal documents. 
  • The directors made various disclosures in the company’s prospectus about the land and the quality of the nitrate that they were going to be producing. The details about the factory, its production capacity and water supply were also enclosed in the prospectus. Consequently, a large number of applications for purchasing shares were received by the company. 
  • The secretary and solicitors of both companies were also 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 shareholders claimed action for rescission of the contract and damages for misrepresentation, misfeasance, breach of trust, and concealment of material facts.

Issues

Whether the company was entitled to receiving damages and rescinding the contract on the basis of misrepresentation, misfeasance, breach of trust and concealment of material facts by the directors of the Lagunas syndicate?

Decision of the Court

  • The Court held that the company was not entitled to the damages or rescission of the contract. The Court held that the shareholders as well as the Plaintiff Company were already aware of the fact that the directors held position in both the plaintiff as well as the respondent company. This information was in public domain and can also be established from the memorandum of association and the articles of association. 
  • The directors did not form an independent board. It was only formed due to the various consequences such as the death of the remaining directors.  However, this could not act as the sole basis to set aside the contract and invoke the responsibility of directors. The Court also observed that the all material facts and information about the company were disclosed to everyone at the time of the contract. Therefore, company was not entitled to rescission nor damages. 
  • The court also held that the plaintiff was unable to provide material evidence to satisfy the charges that they made against syndicate and its directors. The court finally concluded that Syndicate did not engage in any sort of misconduct or misrepresentation and did not breach the contract. 

Analysis

It is important for people to realize that when they are appointed as the directors of any firm, they do not merely get a title to their name. Rather they are awarded with a whole lot of responsibilities. They are accountable and answerable for their actions to the shareholders as well as the other stakeholders in that particular company. These responsibilities are doubled in case a person is a director of multiple companies. This case is a proper representation of how a person is bound to act while working as the director of companies. 

In this case, the Laguna nitrate company ltd. (referred to as ‘company’) charged Lagunas syndicate (referred to as ‘syndicate’) on the grounds of misrepresentation, misfeasance, breach of trust and concealment of facts. During the examination of the facts, the court observed that there was no misrepresentation made by the syndicate as contended by the company. The court clearly stated that the company failed to establish any material facts against the syndicate in the court except about the state of the water supply and the degree of production of the Macquina mentioned in the prospectus issued on 18th June 1984. 

The court also stated that the directors had reasonable grounds to believe that the company was acquiring the property at a favorable price and not at exorbitant rates. The directors were also expert men in nitrate grounds and the made sufficient and reasonable enquiries about the quality of the grounds. In addition, all their actions were purely directed towards the best interests of the company. The directors had reasonable grounds to believe that huge profits could be extracted from the nitrate. 

On the contention of the company that the factory could not produce the amount of nitrate that was stated in the prospectus, the court stated that with proper number of workers and means, the said rate of the production could be achieved. Therefore, this contention of the company was set aside by the court. 

There were defects about the possession of the macquina and water supply which were duly established in the court by way of evidences presented by the company. However, the directors were justified in their action as they acted under the belief that the defects were only temporary. Therefore, the directors had no wrong intention whatsoever, and thus, they did not have any fraudulent intentions. The property was passed without any fraudulent intentions and complete disclosure regarding it was made and the contract could not be rescinded. The action of the company on the grounds of fraud was also not well formed and was set aside.

The court has been extremely observant and insightful in its way of dealing with all the issues raised by the company. The court not only dealt with all the issues separately, but also presented a reasoning as to why the particular charges against the syndicate were held invalid. The court clearly held that the company was not entitled to damages because there was no breach of contract on the part of the syndicate. Even if they wanted to recover damages, only nominal damages could be awarded. 

Moreover, the disclosure about all the material facts was also provided by the directors under their reasonable beliefs. The status of the directors was duly known to the plaintiff and thus they could not contend that the syndicate engaged in any sort of misconduct or misrepresentation of the facts. 

Conclusion

A substantial part of the case dealt with the actions of people while they were acting as the directors of the company or corporation. Acting as the director of any corporation, a person could be held liable for his actions. However, he is not liable for all the actions of the company. The central consideration here is whether the act was done in good faith or not. If a person undertakes an action believing it to be in the best interests of the firm, after exercising due diligence the action cannot be recorded as misrepresentation or breach of trust. If all the material facts about the firm have been revealed and made public with a reasonable understanding in the truth of those facts, it is counted as reasonable care and directors could not be held responsible. 

It could also be concluded from this case that without existence of material evidence, actions could not succeed in the court of law. However, if people are acting as directors of multiple companies at a time, they are required to undertake all reasonable standards of diligence in their actions. 

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