Case 16. Liability of Directors

Caius, an English nobleman and a Catholic, is asked by Julius, a promoter of commercial and industrial companies, to give his name as a director to a certain new company being promoted by him. Since Caius knows absolutely nothing concerning the affairs of that company, and does not intend to learn, he discloses his ignorance to Julius, who nevertheless denies that ignorance in any way prevents him from becoming a director, since very many persons, led by the noble name of a director, are accustomed to contribute money to companies; indeed, he offers Caius five thousand pounds if he consents to give his name. Caius asks for time to deliberate, and meanwhile consults a confessor concerning the lawfulness of the business. Hence it is asked:

1. What is a contract of partnership?

2. What are the obligations of directors of companies?

3. What is to be said of the case?

1. What is the contract of Partnership?

Partnership is the relation which exists between persons who carry on business in common with a view to profit. By English law any persons may enter into such a partnership, provided they do not exceed twenty in number, or ten in the case of a banking business. The partners retain their individuality, and each partner is an agent for the rest in the matters relating to the partnership. If seven or more people wish to form a company, they subscribe their names to a Memorandum of Association and procure registration by the Registrar of Joint Stock Companies. Thereupon the members become a body corporate, a legal personality, which has rights and obligations distinct from those of the members. Modern companies are usually formed with limited liability, so that the individual members are liable for the company's debts only to the extent of their shares in its capital.

2. What are the obligations of company directors?

Directors are those appointed to manage the affairs of a company. They are the company's agents for the transaction of its business, and they should have the knowledge, capacity, integrity, and diligence required for such a position. Those who subscribe to the capital of the company are frequently led to do so by seeing the names of capable and honest men among the directors. Hence the liability of directors both in the forum of conscience and of law. English law makes directors in general liable for false statements in the company's prospectus, for violation of duty, and for gross negligence of duty.

3. The case. From what has been said it is obvious that Caius can not allow himself to be made a director of the future company without knowing more about it. The promoter wishes to use him as a decoy, and if he allows him to do so, he will be responsible for the loss inflicted on shareholders if the company turn out to be unsound. Caius must therefore either satisfy himself that the proposed company is a sound and honest enterprise, or he must refuse to allow himself to be made a director.