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IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships

Arvind is a non-executive director of Lotus Re Ltd. The company's accounts, signed by the board, later turn out to contain a material misstatement that the finance head concealed. Arvind attended every meeting, received board papers, but never read the financial statements and asked no questions. Which view is most defensible?

Arvind may be exposed to liability because non-executive directors still owe a duty of reasonable care and cannot ignore information available to them. His liability is judged by what a diligent non-executive would do, not treated as identical to the fraudulent finance head.

  1. AHe is automatically free of liability because non-executive directors have no duties
  2. BHe is automatically liable in the same way as the finance head who concealed the facts
  3. CHe is free from liability because the finance head acted fraudulently
  4. DHe may be exposed to liability, since a non-executive director still must exercise reasonable care and cannot ignore available information, though the standard differs from the executives'Correct
  5. He is liable only if he profited personally

Explanation

Non-executive directors owe the same duties but their involvement is judged in context. Ignoring papers and asking nothing falls short of reasonable diligence, so exposure exists. It is not automatic identical liability with the fraudster, and personal profit is not required.

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