This section is from the book "Canadian Banking Practice", by John T. P. Knight.
Question 594. - Can you inform me why the wording in the bank returns to the government in regard to directors' liabilities was changed from "Aggregate amount of loans to and liabilities, direct and indirect, or directors and firms and partnerships in which they or any of them have any interest," to the present wording, viz.:
"Aggregate amount of loans to directors or firms of which they are partners."
It has been suggested that the latter refers only to the direct liability of directors, or firms of which they are partners, and not to the indirect, as it is contended there is a difference between making a loan to a party or firm and discounting business paper for them.
Those who hold the other view do not consider there is any difference, and that the latter form of return requires just the same information former ones called for.
Answer. - The change in the government statement respecting directors' liabilities was adopted, we believe, on the ground that it was not reasonable to show the "indirect" liabilities of directors, and that a bank should not be exposed to criticism merely because it took the precaution of requiring a good endorsement on its loans, even if this endorsement were one of its own directors.
As to the difference between the meaning of the present phrase and that previously used, the chief difference is, that where a director (or his firm) is liable on paper which has been discounted for other parties, it is not now shown as part of the directors' liability. This, however, is quite distinct from the question raised, as to whether, under the present clause, business paper discounted for directors should be shown. No doubt the discounting of such paper is not, speaking strictly, a loan, but it is so regarded and spoken of in ordinary language, and we think that business paper discounted for a director or his firm should be shown as a liability. We believe that to be the general practice.