Duty Of Care, Skill And Diligence
Duty of Care, Skill, and Diligence – Overview
The Duty of Care, Skill, and Diligence is a core fiduciary obligation of directors under corporate governance laws. It requires directors to act with the level of care, competence, and diligence that would reasonably be expected from someone in their position. This duty is often codified in company legislation such as the Companies Act, 2013 (India), Companies Act 2006 (UK), and reflected in common law.
Key Aspects:
Care: Directors must exercise attention and prudence in their decision-making. They must make informed choices, considering all relevant facts and risks.
Skill: Directors should apply the knowledge, expertise, and professional competence they possess. A director with specialized skills is expected to exercise a higher standard in areas of their expertise.
Diligence: Directors should act consistently with ongoing monitoring and supervision, ensuring company affairs are properly managed.
This duty is both subjective (based on a director's personal knowledge and experience) and objective (based on what a reasonably competent director would do in similar circumstances).
Legal Framework Examples
India: Section 166 of the Companies Act, 2013 – Directors must exercise reasonable care, skill, and diligence.
UK: Section 174 of the Companies Act 2006 – Requires directors to exercise care, skill, and diligence reasonably expected of someone in their position.
US (Delaware Law): Directors must act in good faith, with care of an ordinarily prudent person, per DGCL §141(a) and relevant case law.
Standards of Liability
Objective Standard: Reasonable care expected of any director (prudence in decisions).
Subjective Standard: Higher standard for directors with special expertise or qualifications.
Business Judgment Rule: Courts often defer to directors’ decisions if made in good faith, with reasonable care, and in the company’s best interests.
Illustrative Case Laws
Here are six notable cases illustrating the application of duty of care, skill, and diligence:
Re City Equitable Fire Insurance Co Ltd [1925] (UK)
Established early common law principles on director liability.
Court held directors are not required to exhibit “utmost” skill, only reasonable care and honesty.
Introduced the concept of subjective standards for diligence.
Caparo Industries plc v Dickman [1990] (UK)
Clarified the standard of care in negligence claims.
Directors must exercise reasonable skill expected from a competent director, considering the nature of the company and director’s experience.
Re Barings plc (No 5) [1999] (UK)
Directors failed to oversee the bank’s risk management, leading to massive losses.
Court held directors liable for lack of diligence, emphasizing ongoing monitoring duties.
ASIC v Healey [2011] (Australia) – “Centro Case”
Directors approved financial statements without adequate review.
Court found breaches of duty of care and diligence due to failure to understand financial reporting.
Reinforced the objective and subjective dual standard of care.
BCE Inc v 1976 Debentureholders [2008] (Canada)
Directors acted prudently in approving a restructuring plan.
Court highlighted that directors’ business judgment must be informed and made in good faith.
Demonstrates protection for directors exercising care and diligence even in complex situations.
In re Walt Disney Co Derivative Litigation [2005] (US, Delaware)
Directors approved a severance package without adequate oversight.
Court clarified that while the business judgment rule protects directors, gross negligence or failure to exercise oversight can constitute breach of duty.
Key Takeaways from Case Law
Directors are expected to actively supervise company affairs; mere presence is insufficient.
Standard of care rises with special expertise; professionals must meet higher expectations.
Delegation is allowed, but directors remain responsible if monitoring mechanisms fail.
Courts differentiate between honest mistakes and negligence due to lack of diligence.
Practical Guidance for Directors
Stay informed: Regularly review financial reports, operational updates, and legal compliance.
Document decisions: Minutes and board resolutions demonstrating due diligence protect directors legally.
Seek expert advice: Where outside expertise is needed, rely on competent advisors.
Continuous oversight: Implement risk management and audit processes to ensure accountability.
Understand personal limitations: Avoid decisions in areas where the director lacks skill without support.
This duty is a cornerstone of corporate governance, ensuring that directors balance entrepreneurial freedom with accountability.
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