Re City Equitable Fire Insurance Co

Re City Equitable Fire Insurance Co
Court	Court of Appeal of England and Wales
Citation(s)	[1925] Ch 407
Case history
Prior action(s)	Romer J (in the High Court)
Court membership
Judge(s) sitting	Lord Pollock MR Warrington LJ and Sargant LJ
Keywords
Duty of care

Re City Equitable Fire Insurance Co [1925] Ch 407 is a UK company law case concerning directors' duties, and in particular the duty of care. It is no longer good law, as it stipulated that a "subjective" standard of competence applied. Now under Companies Act 2006 section 174, and given the development of the common law in Re D'Jan of London Ltd, directors owe an objective standard of care based on what should reasonably be expected from someone in their position.

The company lost £1,200,000 in failure of investments and the large scale fraud of the chairman, Gerard Lee Bevan, ‘a daring and unprincipled scoundrel’. The liquidator sued the other directors for negligence. The auditors were sued too, but the Court of Appeal held they were honest and exonerated by provisions in the company’s articles.

Romer J held that some of the directors did breach their duty of care. But they were not liable to reimburse, because an exclusion clause for negligence was valid. And even in absence of exclusion clauses, in his view, ‘for a director acting honestly himself to be held legally liable for negligence, in trusting the officers under him not to conceal from him what they ought to report to him appears to us to be laying too heavy a burden on honest businessmen.’ Though he felt ‘some difficulty’ with the distinction, negligence would need to be ‘gross’ to visit liability. The principles he set out as follows.

"I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information and advice, of the chairman and general manager, as to whose integrity, skill and competence he had no reason for suspicion. I agree with what was said by Sir George Jessel in Hallmark's Case, and by Chitty J. in In re Denham & Co. 84, that directors are not bound to examine entries in the company's books. It was the duty of the general manager and (possibly) of the chairman to go carefully through the returns from the branches, and to bring before the board any matter requiring their consideration; but the respondent was not, in my opinion, guilty of negligence in not examining them for himself, notwithstanding that they were laid on the table of the board for reference."

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