## Facts

- City Equitable Fire Insurance Co. Ltd. suffered a collapse and entered winding up after an approximate £1.2 million shortfall.
- The shortfall was due partly to investment depreciation but mainly to fraud and misappropriation by the managing director/chairman, who was convicted.
- In the winding up, the Official Receiver (as liquidator) brought a misfeasance application under s. 215 of the Companies (Consolidation) Act 1908 against the non-fraudulent directors and the auditors.
- The liquidator alleged negligent inattention and failures of supervision over investments, loans, internal controls, and payment of dividends, including dividends allegedly paid out of capital.
- The company’s articles contained an exemption provision (Article 150) stating directors, auditors, and officers were not liable for loss occurring in execution of their offices unless caused by their own “wilful neglect or default.”
- It was accepted that, aside from the fraudulent managing director, the directors acted honestly.

## Issues

1. What standard of care and skill governs directors’ performance of management and oversight functions.
2. Whether an articles provision exempting directors and auditors from liability absent “wilful neglect or default” is effective to bar claims for negligence in misfeasance proceedings.
3. Whether, on the facts, the directors and auditors were liable to contribute to the company’s assets for losses connected to fraud, mismanagement, or misapplication of funds.

## Decision

- The court articulated a largely subjective standard: a director need not display greater skill than reasonably expected from a person of the director’s knowledge and experience.
- The court held directors are not liable for mere errors of judgment, are not required to give continuous attention, and may generally rely on delegated officers absent grounds for suspicion.
- Article 150 was held valid and effective to exclude liability for negligence unless the loss resulted from the individual’s own “wilful neglect or default.”
- “Wilful neglect or default” was construed narrowly, requiring more than ordinary (and more than serious) negligence, approximating conscious disregard or reckless inattention.
- The non-fraudulent directors were not ordered to contribute because their conduct, though imperfect by ordinary standards, was honest and did not amount to “wilful neglect or default” within the exemption clause.
- The auditors were likewise treated as honest and protected by the exemption provision, and were not held liable.

## Legal Principles

- Directors’ duty of care and skill (as stated in this case) is assessed relative to the director’s own knowledge and experience, rather than by a uniform objective benchmark.
- Directors are generally not liable for mere errors of business judgment when acting honestly within their powers.
- Directors’ duties are intermittent and may be performed through periodic board involvement; directors may delegate and ordinarily rely on competent officers unless there are warning signs requiring inquiry.
- An articles clause may validly limit or exclude internal liability of directors and auditors for negligence, and may confine liability to losses caused by the individual’s own “wilful neglect or default.”
- “Wilful neglect or default” denotes conduct beyond carelessness, tending toward intentional or reckless disregard of duty.

## Conclusion

The court refused to impose personal liability on honest non-fraudulent directors and auditors for the company’s losses, applying a subjective director-care standard and enforcing an articles exemption that limited liability to cases of “wilful neglect or default,” which was not proved.


In re City Equitable Fire Insurance Co. Ltd., [1925] Ch. 407 (Ch. 1925)