Duties of Care, Skill and Diligence - s 174 CA 2006 Flashcards
How does this duty differ from the duties considered up until now?
This duty is separate from the other general duties under Ch 2 of Pt 10 of CA 2006, which are fiduciary duties: see s 178 CA 2006.
All the duties considered up until now have been duties of a fiduciary nature.
There is a second type of duty: the duty of care, skill and diligence (s 174). It is different from a fiduciary obligation because it is essentially concerned with negligent conduct. It is not concerned with disloyal conduct. Like negligence – it relates to competence of performance.
⁃ As a consequence, difference remedies flow. The remedy for a breach of the duty of care, skill and diligence is damages.
What is the distinction between ‘skill’ and ‘care’?
There is a distinction between ‘skill’ and ‘care’:
⁃ Skill: concerns the knowledge and experience that a director brings to bear on a problem.
⁃ Care: the way that a director applies their skill - the application of that ability.
**Re City Equitable Fire Insurance Co [1925]
Despite the fact that this duty is codified in s 174, the leading common law authority is still relevant in some respects:
⁃ There were three requirements that were outlined in this case:
⁃ (i) The director must only show such ‘skill’ as ‘may reasonably be only to be expected from a person of his [director’s] knowledge and experience’;
⁃ This is similar to the test under s 174. It was sometimes erroneously misinterpreted as imposing a purely subjective standard - however the fact that there is a reference to the word ‘reasonably’ indicates that it is an objective standard, but there is a subjective element to it
⁃ (ii) ‘continuous attention’ to the company’s affairs is not needed;
⁃ However in the case of Dorchester Finance Co Ltd v Stebbing [1989] non attendance at board meetings was held not to constitute an excuse for negligence - non attendance may well be negligence. This means you can’t simply be ignorant to the company’s affairs.
⁃ (iii) directors may trust other ‘officials’ to carry out tasks honestly, unless there is a basis ‘for suspicion’
Dorchester Finance Co Ltd v Stebbing [1989] 1 BCLC 498
duties of non-executive directors with accountancy experience - unreasonable for them not to attend board meetings and to display no interest in the company.
What are some examples of breach of care, skill and diligence?
⁃ Failure to insure companies premises so that where the building was burnt down the company could not recover its losses.
Dorchester Finance Co Ltd v Stebbing [1989]
⁃ DFC sued three directors (S, P and H) for breach of the duty of care, skill and diligence. DFC was involved in money lending and S and P were chartered accountants and H had lots of accounting experience. P and H were non-executive directors. S was an executive director.
⁃ The company didn’t hold any directors meetings. P+H were signing cheques in blank which S used. The sums were used to make unsecured loans to various persons in breach of money lending legislation. These loans could thus not be recovered so sued the source of the loss - the directors.
⁃ It was held that all the directors (S, P and H) were negligent and had breached their duties of care, skill and diligence. No distinction was made between executive and non-executive directors in terms of liability (however, in practice there tends to be a distinction - in this case it may have been because they all had similar accountancy experience).
Section 174
⁃ Section 174 CA 2006, which is in very similar terms to s 214(4) IA 86, now puts this case law on a proper and direct statutory footing regarding the duty of ‘skill, care and diligence’ of company directors.
⁃ The test is in two parts:
⁃ 1) a general standard (174(2)(a)) – a general threshold all directors have to pass; and
⁃ 2) a specific standard (174(2)(b)) – this relates to the qualities of the particular director – hence, different standards, at this level, will be required of different directors (but not at the general level). This means that executive and non executive directs are treated differently in practice.
*Re D’Jan of London Ltd [1994] 1 BCLC 561
Caselaw involving s 214(4) IA 86 (now s 174)
D’Jan negligently failed to read an insurance form, filled in by his insurance broker; mistake in form meant insurers did not pay out for fire damage to company’s premises.
Norman v Theodore Goddard [1991] BCLC 1028 (applies s 214 IA 86)
??
Equitable Life Assurance v Bowley [2004]
para 35 (non-executive directors – in theory, treated the same; in practice, normally different).
Re Westmid Packaging Services Ltd v Griffiths [1998]
Acknowledges that there can (and always will) be delegation. But this does not mean that there can be a total abrogation of responsibility from the director.
Secretary of State For Trade and Industry v Baker (No 5) (Re Barings (No 5)), [2000]
In this case it was noted that directors must have “sufficient knowledge and understanding of the company’s business” - they can’t just sit on the sidelines and do nothing.
Lexi Holdings Plc (in administration) v Luqman [2009]
(liability of non-executive directors).
*Brumder v Motornet Service and Repairs Ltd [2013] EWCA Civ 195; [2013] 1 WLR 2783, paras 46 and 55.
Case law under s 174 CA 2006
