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Company Law Reform Bill [HL]

The question of the standard of care which a director owes is enormously important. The law has changed from what it appeared to be in the 19th century. In 1892, the Marquis of Bute had been appointed as president of a bank at the age of six months and attended one meeting in 39 years, but the court did not find any failure by him in his duty to the company. So the standards then were fairly low. But that has all changed and it is now accepted that the duty of care, the standard of care, is accurately stated in Section 214(4) of the Insolvency Act 1986, which is really what the clause provides. Under the clause, you take account both of the general knowledge, skill and experience that may be reasonably expected of a person carrying out those functions and the general knowledge, skill and experience that that director has. It is a cumulative requirement. It was believed by Lord Justice Hoffmann—as the noble and learned Lord then was—to be the common law; the Law Commissions believed it represented the common law and should be set out in statute; the Company Law Review agreed and so do the Government. That is why the clause is drafted as it is now. I want to emphasise the point that it is not making a change from what is already the common law. The removal of subsection (2) would leave us quite uncertain as to what the standard of care is. Removing subsection (2)(b) would remove one of the elements upon which the director’s performance is to be judged. That would give rise to two questions. First, what about the director who has some particular qualification or experience? Of course, that may be one of the reasons why it is appropriate he should be a director. The shareholders of the company, when looking at the board of directors and deciding whether they want to invest or do business with it, may be encouraged and comforted by that, so it certainly would not be inappropriate to take that into account. But it is right to make this point: Clause 158 sets out the standard of care required from a director. The standard of care, when that person is acting in a different capacity, may be different. There is a difference between a lawyer—someone who is legally qualified—acting as a director of a company and his acting as the legal adviser to the company. The duty of care will take into account the general knowledge, skills and experience of that director. So a non-executive director who is a lawyer by profession but not employed by the company in that capacity would not be expected to act as if he were the legal adviser to the company but he would be expected to bring his general legal knowledge to bear in carrying out his functions as a non-executive director of the company. I am seeking to draw a distinction; it would be for the courts, ultimately, to determine in a given case the standard to be expected of him. The second question was posed by the noble Lord, Lord MacGregor. If somebody falls far below—or at least below—the standards that would be exercised by a reasonably diligent person, with the general knowledge, skills and experience that may reasonably be expected of a person carrying out the functions, is he to be tested by the standards which we would expect the person carrying out those functions to have? Posed in those terms, the answer is yes. If he does not have the ability to do the job to that standard, he should not be doing it at all. It is a cumulative test.