Duty to exercise reasonable care, skill and diligence
Part 10 A company's directors
(1)A director of a company must exercise reasonable care, skill and diligence.
(2)This means the care, skill and diligence that would be exercised by a reasonably diligent person with—
(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b)the general knowledge, skill and experience that the director has.
In the Companies Acts “director” includes any person occupying the position of director, by whatever name called.
Defined in s.250 · see it in the full Act“company” means a company formed and registered under this Act, that is—
a company so formed and registered after the commencement of this Part, or
a company that immediately before the commencement of this Part—
was formed and registered under the Companies Act 1985 (c. 6) or the Companies (Northern Ireland) Order 1986 (S.I. 1986/1032 (N.I. 6)), or
was an existing company for the purposes of that Act or that Order,
(which is to be treated on commencement as if formed and registered under this Act).
(4) In this section and that Schedule “company” includes any body corporate.
Defined in s.1159(4) · see it in the full ActThe duty of reasonable care, skill and diligence is objective and is not fiduciary. When the creditor-interest rule applies, its exercise must be directed to the company’s interests as then understood (see paras [73]-[74]; [156]; [225]).
The section contains the director’s duty to exercise reasonable care, skill and diligence. It required the sole director to take reasonable steps concerning the company’s health and safety obligations; total inattention to those matters constituted a breach (see paras [45]–[48]). The subsection establishes a two-part standard combining an objective minimum with any higher standard arising from the particular director’s actual knowledge, skill and experience (see paras [46]–[47]; [55]). The paragraph sets an objective minimum based on the general knowledge, skill and experience reasonably expected of a person performing the director’s functions. A sole director’s complete failure to address health and safety fell below that standard, regardless of his lack of mechanical expertise (see paras [46]–[48]). The paragraph raises the required standard where the particular director has greater knowledge, skill and experience than would ordinarily be expected. The decision rested on failure to meet the objective minimum, so no enhanced standard was necessary (see para [46]).
Interprets the statutory duty of reasonable care, skill and diligence as incorporating objective and subjective elements. A judge need not separately articulate each element where the governing standard and breach are clear from the findings (see paras [25]-[31]). Applies the statutory requirement that a director exercise reasonable care, skill and diligence when assessing the adequacy of the findings against the appellant director (see paras [25]-[31]). Interprets the statutory standard as containing objective and subjective considerations. The trial judge was not required to state separately how each consideration operated if the role, conduct and breach were adequately identified (see paras [27]-[31]). Limits the need for a separately itemised finding concerning the knowledge, skill and experience reasonably expected of a person performing the relevant functions, provided the judge’s factual conclusions show the applicable standard and breach (see paras [28]-[31]). Limits the need for a separately itemised finding concerning the director’s actual general knowledge, skill and experience where the judge has recognised the statutory law and made adequate findings about the director’s functions and conduct (see paras [28]-[31]).
111 more judgments, and what each says about section 174, are in the case-law panel in the full Act.
336.This duty codifies the director’s duty to exercise reasonable, care, skill and diligence. Traditionally, the courts did not require directors to exhibit a greater degree of skill than may reasonably be expected from a person with their knowledge and experience (a subjective test). More recently, the courts have said that the common law standard now mirrors the tests laid down in section 214 of the Insolvency Act 1986, which includes an objective assessment of a director’s conduct. This section is modelled on that section.
337.The section provides that a director owes a duty to his company to exercise the same standard of care, skill and diligence that would be exercised by a reasonably diligent person with:
the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as the director in relation to that company (an objective test); and
the general knowledge, skill and experience that the director actually has (a subjective test).