In Re City Equitable Fire Insurance Company case

In Re City Equitable set out the common law position , is a case concerning the director’s duties, and thus became the leading case. It is a UK Company law case. This case is important in the sense that it has arisen in the course of the liquidation of a notable reinsurance company with many liabilities. The company was at one time prosperous, and in a short time it was brought to a tragic end  by the fraud of its chairman, who got later convicted and was sentenced to a term of imprisonment. It was a result of bad investment decision. Its downfall has involved many  persons in its ruin and consequent suffering to them. The chairman of the company committed frauds by claiming to buy Treasury Bonds just  before the end of that accounting period and selling them just after the audit report. Using this method a debt due to the company from a firm in which the chairman had an interest was condensed on the balance sheet by increasing the assets. The liquidator of the company tried to make the other directors liable for failing to discover the fraud. The issue aroused because they had left the management of the company entirely in the hands of the chairman. The liquidator failed. Trustee in bankruptcy brought action against the directors and auditors alleging negligence and breach of duty.

In the instant case the issue raised was what the common law standard of care for directors and officers.

Romer J held that some of the directors did breach their duty of care. But they were not liable to compensate, as an exclusion clause for negligence was binding in this case. 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. liability. Romer J laid down the duties of care and skill to be expected of a director in this case. They are: (a) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from someone of his knowledge and experience. (b) A director is not bound to give continuous attention to the affairs of the company.

(c) Where duties may properly be left to some other official, a director is justified, in the absence of grounds for suspicion, in trusting that official to perform his duties honestly.

Later, in Court of Appeal, Romer J’s decision was upheld.