CITY EQUITABLE FIRE INSURANCE CO., RE (1925) CH. 407

CITY EQUITABLE FIRE INSURANCE CO., RE (1925) CH. 407       

FACTS

• 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.

 

HELD
Some directors had been negligent but there was a valid exclusion of liability clause in the articles.

• Romer J: “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 of a life insurance company, for instance, does not guarantee that he has the skill of an actuary or of a physician.
• “A director is not bound to give continuous attention to the affairs of the company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever in the circumstances he is reasonably able to do so.”
• “In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.”

 

COMMENTARY
“Another reason why directors have been described as trustees is the peculiar nature of their office. The directors are persons selected to manage the affairs of the company for the benefit of the shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and entirely. Some of their duties to the company are of the same nature as those of a trustee. For example, they, like trustees, occupy a fiduciary position. Moreover, almost all the powers of directors are powers in trust. The power to make calls, to forfeit shares, to issue further capital, the general powers of management and the power to accept or refuse a transfer of shares, are all powers in trust which have to be exercised in good faith for the benefit of the company as a whole. Yet directors are not trustees in the real sense of the word. There is nothing in common between a director and "a trustee of a will or of a marriage settlement.
Beginning with Romer J's formulation of directors' duties, a constant judicial effort has been maintained in putting some objectivity into the standards of skill and care expected from directors. His duties will depend upon the nature of the company's business and the manner in which the work of the company is distributed between the directors and other officials of the company. In discharging these duties a director must exercise some degree of skill and diligence. But he does not owe to his company the duty to take all possible care or to act with best care. Indeed, he 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. It is, therefore, perhaps, another way of stating the same proposition that directors are not liable for mere errors of judgement. This is a well-known observation of Romer J in the celebrated case of City Equitable Fire Insurance Company… Exclusion from liability either by agreement or by a provision in the Articles was rendered void under Section 201 of the 1956 Act. There is no direct provision on this point in the 1913 Act. The effect of Section 201 (1956 Act) would still be there indirectly. There is now a statutory formulation of directors' duties under Section 166.That section contains no provision for modification of duties. The only relief now is through court under Section 463 by providing honest conduct. If the company had taken out a policy of insurance of such liability, the premium would not be considered as a part of remuneration if the director in question is acquitted. [S. 197(13)] No relief is possible against criminal liability. Though this provision came into being in reaction to the decision in the City Equitable case, its scope is not confined merely to contracting out of the consequences of negligence. Apart from negligence, it renders void any provision in the articles or in an agreement which exempts a director from liability for default, misfeasance, breach of duty or breach of trust.”