Re City Equitable Fire Insurance Co Ltd
Under the old common law, a director needed to show only the degree of skill that might reasonably be expected from a person of his knowledge and experience, a subjective standard now replaced by statute.
Facts
City Equitable Fire Insurance Company suffered huge losses because of the fraud of its chairman, Mr Bevan, who had misappropriated large sums. The other directors had not detected the fraud, partly because they had relied on the chairman and the company's officers. The liquidator sued the directors for negligence.
Legal principle
Romer J, whose judgment was upheld by the Court of Appeal, held that the directors were not liable, partly because of an exemption clause in the articles. He set out three propositions: a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience; a director is not bound to give continuous attention to the affairs of his company, his duties being of an intermittent nature; and, in respect of all duties that may properly be left to some other official, a director is justified in trusting that official to perform such duties honestly. The subjective standard has been replaced by the objective test in section 174 of the Companies Act 2006.
Related cases on directors' duties: powers, judgment and care
- Bamford v Bamford [1970] Ch 212
- Re Barings plc (No 5) [1999] 1 BCLC 433
- BTI 2014 LLC v Sequana SA [2022] UKSC 25, [2024] AC 211
- Re D'Jan of London Ltd [1994] 1 BCLC 561
- Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498
- Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71
- Hogg v Cramphorn Ltd [1967] Ch 254
- Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
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