A QUICK LOOK AT... CITY EQUITABLE FIRE INSURANCE CO LTD [1925] CH407

This decision of Romer J in the High Court (subsequently upheld by the Court of Appeal) marked the first occasion on which the English courts considered the subject of company directors’ duties from anything like a modern business perspective. The case resulted from the insolvency of an insurance company due to the manifold illegal activities of its managing director, Bevan (described by Romer J as “a daring and unprincipled scoundrel”). Subsequently, the company liquidator sought an order to require the other directors of the company to contribute to the company’s assets on the basis of their having committed misfeasance contrary to what is now s212 of the Insolvency Act 1986.

The directors were exculpated due to a clause in the company’s articles of association which provided that they could only be liable for the company’s losses if such losses arose due to their “wilful neglect or default” (such a provision would now be unlawful due to s232 of the Companies Act 2006). However, the importance of the case lies in the care taken by Romer J to set out what he considered to be the fundamental features of company directors’ duties of care and skill. Romer J held that directors must act honestly and according to the standards reasonably expected of persons of their knowledge and experience, that they should attend board meetings when they are reasonably able to do so, and that they may entrust responsibilities to other company officials in the absence of grounds to suspect such people of misconduct. These repeated references to acting “reasonable” marked a dramatic change from the very low and entirely subjective standards expected of directors in earlier cases, and set the scene for reform of the law on directors’ duties. However, it would be many more years before this would occur.