Dovey v Cory [1901] AC 477 (HL)

Facts

  • The case concerned the duties and responsibilities of company directors, specifically regarding reliance on the work and reports of other company officials.
  • A chairman had approved financial reports produced by the company secretary and auditor.
  • Issues of negligence, director oversight, and the boundaries of acceptable reliance on other officials' actions arose due to concerns of financial mismanagement.
  • The court examined the expected level of care and separate judgment directors must exercise in fulfilling their fiduciary duties.

Issues

  1. To what extent may a company director rely on information and reports provided by other company officials, such as the secretary or auditor?
  2. What is the standard of care and oversight required of directors in monitoring company affairs, particularly financial matters?
  3. Can directors avoid liability for negligence by trusting other officials without independent review?

Decision

  • The House of Lords held that directors may rely on reports and work of other officials only when such trust is reasonable, accompanied by sufficient personal oversight and verification.
  • Delegation of particular tasks does not relieve directors of their overarching accountability for the company’s financial status.
  • Directors are responsible if their reliance on others amounts to passive trust without proper checks or if their actions fall below the standard of care expected.
  • Ignorance or blind trust is not a valid excuse for failing to meet expected duties.

Legal Principles

  • Directors must exercise a standard of care, skill, and diligence consistent with the competence expected from their position.
  • Reliance on other company officials is allowed only when reasonable, and directors must maintain internal checks and independent assessment.
  • Directors have a fiduciary duty to use their own judgment, participate actively in company affairs, and, when necessary, seek external advice.
  • Legal standards require directors to take appropriate steps to verify the accuracy of information and avoid negligence through insufficient monitoring.

Conclusion

The decision in Dovey v Cory [1901] AC 477 (HL) set enduring standards for director responsibilities, emphasizing that reasonable oversight and independent judgment are essential; passive reliance on others does not absolve directors of their legal duties.

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