Part F Management, administration and regulation of companies 18: Company directors 285
9.4.4 Duty to exercise reasonable skill, care and diligence (s 174)
Directors have a duty of care to show reasonable skill, care and diligence.
Section 174 provides that a director 'owes a duty to their company to exercise the same standard of ‘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.
There is therefore a reasonableness test consisting of two parts:
(a) An objective test
Did the director act in a manner reasonably expected of a person performing the same role?
A director, when carrying out their functions, must show such care as could reasonably be
expected from a competent person in that role. If a 'reasonable' director could be expected to act
in a certain way, it is no defence for a director to claim, for example, lack of expertise.(b) A subjective test
Did the director act in accordance with the skill, knowledge and experience that they actually have?
In the case of Re City Equitable Fire and Insurance Co Ltd 1925 it was held that a director is
expected to show the degree of skill which may reasonably be expected from a person of their
knowledge and experience. The standard set is personal to the person in each case. An accountant
who is a director of a mining company is not required to have the expertise of a mining engineer,
but they should show the expertise of an accountant.The duty to be competent extends to non-executive directors, who may be liable if they fail in their duty.
Dorchester Finance Co Ltd v Stebbing 1977
The facts: Of all the company's three directors S, P and H, only S worked full-time. P and H signed blank
cheques at S's request who used them to make loans which became irrecoverable. The company sued all
three; P and H, who were experienced accountants, claimed that as non-executive directors they had no
liability.
Decision: All three were liable, P's and H's acts in signing blank cheques were negligent and did not show
the necessary objective or subjective skill and care.
In other words, the standard of care is an objective 'competent' standard, plus a higher 'personal'
standard of application. If the director actually had particular expertise that leads to a higher standard of
competence being reasonably expected.
The company may recover damages from its directors for loss caused by their negligence. However something
more than imprudence or want of care must be shown. It must be shown to be a case of gross negligence.
This was defined in Overend Gurney & Co v Gibb 1872 as conduct such that 'no men with any degree of
prudence, acting on their own behalf, would have entered into such a transaction as they entered into'.
Therefore, in the absence of fraud it was difficult to control careless directors effectively. The statutory
provisions on disqualification of directors of insolvent companies and on liability for wrongful trading
therefore both set out how to judge a director's competence, and provide more effective enforcement.
The company by decision of its members in general meeting decides whether to sue the directors for their
negligence. Even if it is a case in which they could be liable the court has discretion under the Act to
relieve directors of liability if it appears to the court that:
The directors acted honestly and reasonably.
They ought, having regard to the circumstances of the case, fairly to be excused.