The duty of reasonable care, skill and diligence for directors
Each private company must have at least one director – and public companies must have at least two. Directors effectively run the company – they have extensive powers to manage the business, including passing resolutions at board meetings to make decisions relating to company practice and procedure. However, the directors of the company are not its owners (these are the shareholders) so there are a number of duties that apply to the way directors exercise these powers. One of these duties is the duty for directors to take reasonable care, skill and diligence in the exercise of these powers. We’re going to have a look at this duty below, including examining the following:
- Where is the duty of reasonable care, skill and diligence specified?
- What standard of care do directors have to live up to?
- Is there any other way in which a director could be held to this standard?
Where is the duty of reasonable care, skill and diligence specified?
This duty, until the Companies Act 2006, was a common law duty. However, since the CA 2006 came into force the duty is codified under s.174 of the same Act. Under s.174 a director must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a reasonably diligent person with:
a) The general knowledge, skill and experience which 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
What standard of care do directors have to live up to?
Directors must carry out their functions with sufficient care and competence. However, there is a two-part test (derived from Norman v Theodore Goddard  BCC 14) which lays down the standard of care expected from directors:
- A de minimis, objective test – what is required of the reasonable director carrying out the particular functions that they’re responsible for
- A subjective test – whether, judged by the experience, skill and knowledge that the individual director has, they’ve fallen below a certain standard in their conduct
If the director has a higher standard of knowledge, experience and skill than that expected under the first part of the test then they will be judged on whether they have reached the standard expected in the second part of the test. For example, a director who has a long period of service will be expected to perform to a higher standard than a newly-appointed director.
Is there any other way in which a director could be held to this standard?
An executive director (who will normally have a written contract of employment) will be required to comply with the express and implied duties contained within their contract of employment, including the express term requiring a duty of skill and care.