Hoffman LJ’s decisions, although perhaps wrong in doing so, can potentially be explained by the changing nature of the director and, in particular, the nature of the non-executive director. During the same time, the Cadbury Committee released a report in 1992 that noted in particular that non- executive directors had come to hold a special function within the company, namely to: ‘Safeguard the shareholders from incompetence on behalf of the executive directors.’ This is a much more intricate role than the well-meaning amateur of the late 19th Century, who simply lent their name
and standing to the company. The Cadbury Committee clearly saw the non-executive director as much more of a check and balance on the Company, in particular ‘if the chairman is an executive director, a senior non-executive director should be appointed in order to maintain a balance between the executive and the non-executive.’59 He continued by remarking however, that this
‘should not detract from the primary contribution which they are expected to make, as equal board members, to the leadership of the company.’60 A far cry from the type of directors found in cases
such as Re Cardiff Bank (Marquis of Bute case) where the Marquis attended board meetings only once in thirty eight years. This expectation by the courts that the non-executive director take a much more active role can also be seen in the case of Dorchester Finance Co Ltd v Stebbing,61 where it was
held there is no difference in the duties owed by executive directors and non-executive directors. The increased expectations placed on directors is echoed by Hoffman LJ himself in Bishopgate Investment Management Ltd v Maxwell (no2),62 he remarks:
‘In the older cases the duty of a director to participate in the management of a company is stated in very undemanding terms. The law may be evolving in response to changes in public attitudes to corporate governance, as shown by the enactment of the provisions consolidated in the Company Directors Disqualification Act 1986.’
He did however, qualify his statement in Bishopgate where he went on to comment obiter that a duty for a director to participate in the management of the company would depend on the manner
59 Cadbury, Report of the Committee on the Financial Aspects of Corporate Governance (London: Gee Publishing, 1992)para 4.3.
60 ibid para 4.7.
61 [1989] BCLC 498, para 130B. 62 [1993] BCC 120.
70 | P a g e in which the particular company’s business was organised and the part the director could reasonably be expected to play.63
As previously noted, there were the beginnings of an objective standard prior to Hoffman LJ going back as early as Re City Equitable Fire Insurance Co Ltd, however, it was not until Hoffman LJ interpreted it as such, that the courts began to impose the higher duty than that of simply the subjective knowledge of the individual. It is interesting to note, nevertheless, that although the Cadbury Committee and the judiciary perceived the nature of a director’s duty to be changing with an increased onus on director activism, directors themselves did not share the sentiment. A good example of this came in the Auditors General Report of 1993, where it was found that 58% of directors questioned did not know of the Company Directors Disqualification Act 1986 and other leading pieces of legislation.64
Whatever the reading of Re City Equitable Fire, it is safe to say following the efforts of Hoffman LJ in
Norman v Theodore Goddard and Re D’Jan of London Ltd, the modern common law duties of skill, care and diligence during the 1990’s followed the dual objective/ subjective standard set out in s.214 of the Insolvency Act 1986. Hoffman LJ’s position was affirmed by a series of cases that followed, in
Bishopgate65where it was held, that a director could not rely on the opinion of fellow directors that a transfer of shares in a pension fund was a proper one, nor avoid liability by showing that the transfer would have gone ahead without his concurrence.
Further in Re Continental Assurance Co of London Plc66 the defendant, a non-executive director of a
company, and its parent company who both collapsed. The wholly owned subsidiary had made advances to the parent company which was in breach of provisions prohibiting financial assistance towards the purchase of shares. Although the director did not realise that there was indebtedness between the subsidiary and its holding company, it was reasonable, that given his background as an auditor accountant, he should have read and understood the company’s statutory accounts. It was not only the judiciary who was in favour of a new objective/subjective test. The Law
Commission of England and Wales and the Scottish Law Commission published a joint consultation document,67 the document recommended the approach found within the Insolvency Act 1986
s.214(4) should be adopted more generally, and what was forwarded by Hoffman LJ in that they
63 Parry, ‘Delegation of directors' duties after Re Barings Plc’ (1999) 25 Company Law Newsletter. 64 Lee Roach, ‘The directors’ duty of skill and care: has the Commission got it right?’ (1999) 20 Bus LR 51. 65Bishopgate Investment Management Ltd (in liquidation) v Maxwell (No2) [1994] BCC 120.
66 [1997] 1 BCLC 48.
67 Law Commission, Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties (Law Com CP No 153, 1999).
71 | P a g e believed that the dual objective/subjective approach to be the modern day approach for directors duties of skill, care and diligence. The Joint Commissions in particular noted:
‘We provisionally consider that such a dual test is appropriate generally not merely where the company is on the verge of insolvency... all directors should be subject to a general standard of care and a particular director should not be able to rely on his own particular lack of knowledge or experience to avoid being subject to that general standard. On the other hand, we consider it fair that if he has some special expertise, he should have to exercise it.’68
Further to this, the commission recommended introducing a s.309A into the Companies Act 1985 that read as follows:
‘A director of a company owes the company a duty to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both—(a) the knowledge and experience that may reasonably be expected of a person in the same position as the director, and (b) the knowledge and experience which the director has.’69
The recommendation clearly follows the previous theories purported by Hoffman LJ and the Insolvency Act 1986 s.214(4).