Chapter 7 Directors' Duties - alastairhudson.com

(1) The subjective level of skill
First, Romer J held that, on the basis of earlier authority, “[a] director need not exhibit in the
performance of his duties a greater degree of skill than may reasonably be expected from a
person of his knowledge and experience”. 66 As Lindley M.R. held elsewhere: "[i]f directors
act within their powers, if they act with such care as is reasonably to be expected from them,
having regard to their knowledge and experience, and if they act honestly for the benefit of
the company they represent, they discharge both their equitable as well as their legal duty to
the company". 67 This means that a director was to have been held to his own, subjective
standard of ability, knowledge and experience, and not that of the reasonable man. Such a
director was required, however, to take the same level of care in the performance of his duties
as an ordinary man might be expected to take when acting on his own behalf.
This understanding of a director‟s standard of care in relation to the company was first
modified in respect of an executive director: that is, by someone who has a service contract
with the company. There is an implied term in such a contract that the director will use
reasonable skill in the performance of the duties of the office based on what might reasonably
be expected from a person in his position. 68 However, more significantly, the general
standard of care for all directors has been restated by Hoffmann L.J. in two cases, with
virtually no discussion as to the rationale for the change, as being the same as the test for
establishing wrongful trading under s.214(4) of the Insolvency Act 1986. These cases are
significant. In Norman v Theodore Goddard, 69 the standard of care expected of directors was
stated as being that of a reasonably diligent person having the knowledge, skill and
experience both of a person carrying out that director's functions and of that person himself.
Thus the test was expressed as being both objective and subjective.
This test was also applied by Hoffmann L.J. in Re D'Jan of London Ltd 70 to establish the
negligence of a director in signing an inaccurate fire insurance proposal form to insure the
company's property. The facts of that case are interesting. The director signed an insurance
form without having read it. As a result, the company failed to disclose the information
required by the insurance company so as to make the insurance contract binding.
Consequently, when the company‟s warehouse caught fire and destroyed a large amount of
stock worth £174,000, the company was uninsured. It was found by his lordship that the
director “did not strike [his lordship] as a man who would fill in his own forms”. 71 Hoffmann
LJ considered that the amount of work and the amount of diligence required of a director
would differ from circumstance-to-circumstance:
“I do not say that a director must always read the whole of every document which he
signs. If he signs an agreement running to 60 pages of turgid legal prose on the
assurance of his solicitor that it accurately reflects the board's instructions, he may
well be excused from reading it all himself. But this was an extremely simple
document asking a few questions which Mr D'Jan was the best person to answer.”
66
[1925] Ch. 407, at p.428.
67
Lagunas Nitrate Co. v. Lagunas Syndicate ([1899] 2 Ch 392, 435.
68
Lister v Romford Ice and Cold Storage Co. Ltd [1957] A.C. 555.
69
[1991] B.C.L.C. 1028. The director was excused liability on the basis of reasonable reliance on another under
the third of Romer J.'s propositions.
70
[1994] 1 B.C.L.C. 561, CA, see also Cohen v Selby [2001] 1 BCLC 176, CA.
71 [1994] 1 B.C.L.C. 561, 562.
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