The revolution regarding the standard of skill and care began with a series of director disqualification cases during the late 1980’s, which were based on the actions brought using s.214 of the Insolvency Act 1986 and the provisions on wrongful trading. Following recommendations made by the Cork Report,33 the enactment of S.214 created a more efficient and accessible mechanism through which
directors of insolvent companies could be held accountable for conduct which was prejudicial to the interests of their corporate creditors.34 The intention of s.214 was to deter irresponsible directorial
conduct35 during a time when a company would be entering into difficulties. Under section 214 if a
director did not take every step possible to minimise the potential loss to creditors, then the courts may hold that director liable to make a personal contribution to the companies’ assets. S.214 was the first piece of legislation that required the courts to apply an objective standard of care when assessing whether a director was liable for wrongful trading. To establish whether the director was
prima facie liable under s.214, it was necessary to show that the director was aware or ought to have been aware that there was no reasonable prospect of the company avoiding liquidation; and he then proceeded to continue to conduct the affairs of the company to the detriment of the liquidators.
The Insolvency Act 1986 s.214(4) states:
For the purposes of subsections (2) and (3), the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both-
33 Department for Trade and Industry, Insolvency Law and Practice, Report of the Review Committee (Cmnd 8558 1982) (the Cork Report).
34 Steve Griffin, Personal Liability and Disqualification of Company Directors (Hart Publishing 1999) 57. 35 ibid 61.
64 | P a g e (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
(b) the general knowledge, skill and experience that that director has.
It is clear that, by introducing section 214(4)(a), the legislature was intending to apply an objective standard as to what a reasonably diligent person would have done given the same facts, a decision that was confirmed in the first case reported on the provisions, Re Produce Marketing Consortium Ltd36 where Knox J held that:
‘The facts which the [directors] ought to have known or ascertained and the conclusions that they ought to have reached are not limited to those which they themselves, showing
reasonable diligence and having the general knowledge, skill and experience which they respectfully has, would have known, ascertained or reached, but also those that a person with the general knowledge skill and experience of someone carrying out their functions would have known, ascertained or reached.’37
This reinterpretation was the first attempt by the courts to introduce an objective standard of liability on directors and, although it had a very limited application, it wasn’t very long before it was adopted as the general desired mode of assessment of directors’ duties of skill, care and diligence. What is interesting to note is that this piece of legislation was enacted only four years after the exclusion order circumventing the liability of directors for the provision of services as noted above. Whilst not conclusive of a rapidly changing ideology, it would appear that the production of the Cork report threw the earlier legislation into question.
The modern development of the law towards an s.214 objective standard was first noted in
Dorchester Finance Co Ltd v Stebbing.38 The non-executive directors sought to rely on the second
limb of the Romer J test by arguing that having agreed to no board meetings ever taking place they could justify this by relying on auditors to do a ‘proper job.’39
Foster J opined that, although the common law still required a director to show a sufficient level of skill in accordance with his own abilities following Re City Equitable Fire Insurance, with regards to the level of diligence, what was required was ‘such care as an ordinary man might have expected to
36 [1989] 5 BCC 569.
37Re Produce Marketing Consortium Ltd [1989] 5 BCC 569, 593. 38 [1989] BCLC 498.
65 | P a g e take on his own behalf.’ This has very clear overtones of an objective standard as Davies notes in particular, ‘This is an objective test and one pitched at a high level, since presumably an ordinary man will be diligent in the promotion of his own affairs.’40 Fosters comments encouraged academics
to consider the possibility of the differentiation between the implementation of a subjective duty of skill and the introduction of an objective standard of care.41 Luckily, academics and the courts alike
did not have to wait long for the clarification of what was considered to be the modern standard of skill, care and diligence. For it appears that, during the early 1990’s, Hoffman LJ attempted a one man crusade to update and bring the common law firmly in line with the theories enshrined in s.214.