LAW OF BUSINESS ASSOCIATION 1

GPR 304

MODULE II EVENING – PARKLANDS CAMPUS

GROUP 22:

NAME REGISTRATION NUMBER

BENEDICT MUTINDA KIMWAKI G34/143135/2021

OMONDI JOHN PETER G34/142281/2021

MERCY CHEROTICH BYEGON G34/139546/2020

BERNARD KAMAU GACHOKA G34/141627/2021

DANEL APOLLO GEORGE G34/143568/2021

i
LIST OF CASES
ASIC v Healey (2011) 196 FCR 291, 427
Australian Securities and Investment Commission v Healy [2011] FCA 717
AWA v Daniels (1992) 7 ACSR 759
Cullerne v. The London & Suburban General Permanent Building Society (1890) 25 Q.B.D.
485.
Daniels v Anderson (1995) 16 ACSR
Deliotte Haskins & Sell v Anderson (1995) 16 ACSR 607
Dovey v. Cory (1901) A.C 477
Dorchester Finance Co v Stebbing (1989) BCLC 498
Ex parte Lebowa Development Corporation Ltd 1989 (3) SA 71 (T)
Fisheries Development Corporation of SA Ltd v Jorgensen (1980) SA 156
Gould v Mt. Oxide Mines Ltd. (1916) 22 C.L.R 490, 530
Greenhalgh v Aderne Cinemas Ltd [1951] Ch 286
Hulse-Reutter v Godde 2001 (4) SA 1336 (SCA) 1346A-B
Jackson v Munster Bank Limited [1884]
James Orina & Another v Kenya Tea Development Company & Another Civil Appeal No
222 of 2004
Lagunas Nitrate Co v Lagunas Nitrate Syndicate Ltd. (1899) 2 Ch 392
Land Credit Company of Ireland v Lord Fermoy (1869) L.R 5 Ch . App 764
Lucas v Fitzgerald (1903) 20 T.L.R
Marquis of Bute’s Case (1892) 26 ER
Norman v Theodore Goddard (1991) BCLC 1028
Overend, Gurney & Co v Gibb (1872) LR HL 480
Prefontaine v Grenier (1907) A.C 101
Re Brazilian Rubber Plantations and Estate Ltd (1991) 1 Ch 425
Re Cardiff Savings bank [1892] 2 Ch. 100
Re City Equitable Fire Insurance Co. Ltd (1925) Ch 407
Re Faure Electric Accumulator Co (1888) 40 Ch D 141.
Re Denham & Co. (1884) LR 25 4 h App 379
Re Forest of Dean Coal Mining Co (1878) 10Ch D 450 453
Re Montrotier Asphatle Company (1876) 34 L.T 716
Re National Bank of Wales (1899) 2 Ch 629

ii
Re New Mashonaland Exploration Company 918920 2 Ch, D 577
R v Morris (1867) 1 CCR 95
Sheffiedl & South Yorkshire Building Society v Aizlewood (1890) 40 Ch. 412
Turquand v Marhall (1872) LR HL 480

iii
DUTY OF DIRECTORS TO EXERCISE REASONABLE CARE, SKILL AND
DILIGENCE- SKILL & CARE

Introduction.

In the case of a sole proprietorship, the sole proprietor personally takes charge of the affairs of
his venture. However, for registered company, having a distinct personality from its owners.
Thus, it becomes necessary to have some few persons in charge of the operations of the
company. These few persona are referred to as directors. Company legislations and the courts
have created and developed principles regarding the person and office of the director.
Nonetheless, since time and memorial, the common law system has played a critical role in
determining and asserting the duties of directors. Kenyan courts have heavily relied on the
common law principles to develop Kenyan jurisprudence in respect to duties of directors.

Since a company is an artificial legal person, it needs individuals who can act for it, represent
it and make decisions concerning how it is to be run. These individuals are directors, who are
officers of the company. Corporate governance is the system by which companies are directed
and controlled.1

As far as the legal requirements in the Companies Acts concerned, every public company is
required to have at least two directors, and every private company is required to have at least
one director. Director as well as being an officer, may well be a shareholder, either voluntarily
or as the result of a share qualification requirement. He may also be an employee of the
company working under a contract of service. The term executive director is normally applied
to this sort of director and he will be expected to perform a specified role for the company.
Non-executive directors, on the other hand, are officers of the company who do not have such
an employment relationship with the company and are usually only awarded a relatively small
fee for rendering their services.

The duty of care, skill and diligence is a very important tool in Corporate Governance. 2
Directors are required to exercise the duty of care, skill and diligence in many ways in a

1
Cadbury Committee, Report of the Committee on the Financial Aspects of Corporate Governance ( the
Cadbury Report), 1992
2
Michael Dion, “The Ethical Principles determining the contents of Corporate Governance, rules and systems.”
Society and Economy, 27(2005) 2 pp. 195-211

1
company. For instance, in financial management during making of approvals, in strategic
decision making such as expansion of business, risk management, compliance and during crisis
just to name a few.

Several writers have dissected the issue of the duty of care, skill and diligence. Among most
of them, they have concurred that the duty of care, skill and diligence of directors has
undergone tremendous growth. Initially the standard of care of directors was very low,
however, with new changes and codification of the duties of directors, they are expected of
more. Directors' duties are owed to the company. It is important to acknowledge that, whatever
duties the directors are subjected to, they owe those duties to the company and not to
shareholders as individuals. This is because, in recent times the company has been viewed as
the corporators as a general body.3 This is readily understood if the directors are viewed simply
as agents for the company, since the company as a separate entity with its own rights and
liabilities is the principal, but, even in the case of Percival v Wright, it was being argued that
the directors were trustees both for the company and for the shareholders, who were the real
beneficiaries, and therefore, the directors owed duties to shareholders. This was easily rejected
by Swinfen Eady J, who stated that directors were not under any fiduciary duty to individual
shareholders. Here, shareholders sought to have share transfers to the directors set aside on the
ground that, at the time they were entered into, the directors had not disclosed to them the
existence of negotiations with a third party for the purchase of the company’s shares, thus
increasing their value. The directors were obliged to act bona fide in the interest of the company
and they had no obligations to disclose the existence of the negotiations.

To describe directors as trustees seems today to be neither strictly correct nor invariably
helpful.4In truth directors are agents of the Company rather than trustee of it or its
property.Companies appoint directors to carry out day-to-day functions required by the
company.5 Apart from having a fiduciary duty, a company director is also under a duty to
exercise care and skill when exercising his or her duties. 6 The simple understanding of the
director’s duty of care and skills is that it entails that the director must carry out the functions
of the office, and exercise such powers as may be necessary for the benefit of the company.7 It

3
Greenhalgh v Aderne Cinemas Ltd [1951] Ch 286
4
City Equitable Fire Insurance Co (1925) CH 407
5
Hulse-Reutter v Godde 2001 (4) SA 1336 (SCA) 1346A-B
6
R.C Williams , Concise Corporate and Company Law. (2nd ed, 1997)
7
D. Lee ‘The Business Judgment Rule:Should it protect Nonprofit Directors,’(2003) Columbia Law Review
2003.

2
is important to note that there are practical difficulties in prescribing an appropriate and
acceptable standard of care and skill for company directors since directors are not members of
a professional body.8

Defining Skill and Care

In order to define skill and care it is imperative to understand who is a “director.” The
Companies Act 2015 defines a director as any person occupying the position of director for the
body (whatever name the person is called) and any person with whose directions or instructions
(not being advice given in a professional capacity) the directors of the body are accustomed to
act.9

The definition refers to the word “include” which means that the same is not exhaustive. In
addition, the first part of the definition “any person who occupies the position of director of the
body…” does not expressly define the term director since it just refers to the position being
occupied. On the other hand, the second limb of the definition posits that the position of
“director” is also established by virtue of the role that a person plays in a company.

Nonetheless, the director’s duty of skill and care is governed under Section 145 of the
Companies Act.10 However, the act does not define the term skill and care. Howbeit, the same
can be defined as the responsibility that a person or business has when doing business with, or
otherwise interacting with, other people and businesses.11 Under tort law, duty of care is
defined as the responsibility of a person or business to act as a reasonable person would act in
a similar situation. A person who violates his duty of care by acting in a negligent or reckless
matter is then liable for any harm that another person suffers as a result of his behavior.

The Test for Skill and Care

Riley, in paper, “The Company Director’s Duty of Care and Skill”12 provides a framework for
understanding the duty of care and skill of directors. He avers that there might be a diversity in
the role of directors depending upon the company they serve, the functions they perform, and

8
FHI, Cassim, Contemporary Company Law (2nd eds 2012) 555
9
Companies Act, No 17 of 2015, sec. 3
10
Ibid
11
McLennan, S. Duties of skill and care of Company Directors and their liability for negligence. (1996) 8 South
African Merchantile Law Journal 94-102
12
C.A Riley, “The Company Director’s Duty of care and Skill: The case for an Onerous but Subjective
Standard.” The modern Law Review , Vol.62, No. 5 (September 1999) pp. 697-724
< https://www.jstor.org/stable/1097382?read-now=1#page_scan_tab_contents>

3
their executive and non-executive status. His paper looks at the issue in two ways, first, it looks
at the functions that directors are expected to perform and secondly it questions how the
standard of liability for their failure to perform should be judged.

The Traditional Approach

The standard of skill and care has seen development under the English common law over the
centuries. What was a mere lax standard of the duty of care and skill under the common law
has in recent times attracted more stringent modern standard to the extent of being codified
under the Companies Act, 2015.

The traditional approach to the duty of care demanded little from company directors.13 In Re
Denham & Co,14 a director who had neglected his duties for many years and who had been
charged for negligence in the Chancery Court was inexplicable adjudged not to have breached
his duty of care towards the company. 15 The courts were reluctant to enforce this duty as the
same was based on the belief that the shareholders appointed an incompetent director, and so
only themselves are to be blamed. Thus, the responsibility was on the shareholders to take
remedial measures.

In Turquand v Marhall,16 a case in relation to a loan made by the board to one of the directors
who died insolvent and never repaid the loan, and the court found no liability on the directors.
The court stated that it was within the powers of the deed to lend to a brother director, and
however, foolish the loan might have been, so long as it was within the powers of the directors,
the court could not interfere and make them liable. Whether amount lent, however ridiculous
and absurd their conduct might look, it was the misfortune of the company that they chose
unwise directors. However, since the directors acted within their power, the court couldn’t
interfere with their discretion.17

The reasoning of the court on the liability for negligence has been associated with the “business
judgment rule” which developed in some jurisdictions such as the United States. 18 The rule
holds that provided any judgment which the director is required or permitted to exercise under

13
Alan Dignan, Hicks & Goo’s Cases & Material on Company Law (7th ed, Oxford University Press, 2011)
14
Re Denham & Co. (1884) LR 25 4 h App 379
15
Ibid
16
Turquand v Marhall (1872) LR HL 480
17
Ibid. p 366
18
Re New Mashonaland Exploration Company 918920 2 Ch, D 577

4
the company’s constitution has been exercised bona fide, there is no liability for the
consequence of a faulty judgment.19

The rationale that mere negligence was not sufficient to sustain a claim against a director was
held in Overend Gurnery & Co. v Gibb.20 The case concerned the acquisition of a banking
business that had initially been very successful, but at the time of acquisition, the bank had
incurred losses and basically insolvent. The House of Lords held that the purchase while risky
and imprudent was not irrational and that a director was not liable for breach of duty care, skill
and diligence except where the director acted with “crassa negligentia.”21 The learned judges
stated

“that it would be very fatal error in the verdict of any court of justice to attempt to
measure the amount of prudence that ought to be exercised by the amount of prudence
which the judge himself might think, under similar circumstances, he should have
exercised. Therefore, it was the opinion of the judge that it would be extremely likely
that many a judge, or many a person versed by experience in the conduct of mankind,
as conducted in the corporate world, would know that there is a great deal more trust, a
great deal of speculation and readiness to confide in the probabilities of things, with
regard to success in mercantile transactions, and as such there exist different characters.
Thus, the judge concluded that it would be wrong to import into consideration of the
case of a person acting as a mercantile agent in the purchase of a business concern,
those principles of extreme caution which might dictate the course of one who is not at
inclined to invest his property in any venture of such as hazardous character.”

Since the delivery of the above judgment, English courts have not formalised the considerations
expressed in the above excerpt and delineated the boundaries of a director’s business judgment,
within which the courts will only exercise limited review. 22 The courts insisted on gross
negligence for a claim of liability to ensue, and any deviation from these standards, a claim for
breach of duty of care would fall.23

19
Ibid
20
Overend, Gurney & Co v Gibb (1872) LR HL 480
21
Ibid
22
Paul L. Davies, Gower and Davies ‘Principles of Modern Company Law (7th ed, Sweet & Maxwell 2003)
23
Lagunas Nitrate Co v Lagunas Nitrate Syndicate Ltd. (1899) 2 Ch 392

5
Negligence must not be the omission to take all possible care; it must be much more blameable
than, in that it must be culpable gross.24 Therefore, where a director commits gross misconduct,
the director could easily be exonerated from any form of liability as was in the case of Re
Brazilian Rubber Plantations and Estate Ltd. 25 In this case, the directors were unsuccessfully
sued for loss as a consequence of poor speculations and analysis in the rubber plantations in
Brazil. The directors’ decisions were influenced by a fraudulent report. The court held that a
director’s duty is to act with such reasonable care, having regard to his knowledge and
experience. In addition, the court held that a director is not bound to bring any special
qualifications to his office. However, where a director has knowledge of the rubber industry,
the director would be obliged to apply that knowledge to his ability.26 This was a subjective
attitude towards the director duty of care that opened doors of incompetency among
directors.27Neville J, described the directors thus:

“The directors of the company, Sir Arthur Aylmer Bart., Henry William Tugwell,
Edward Barber and Edward Henry Hancock were all induced to become directors by
Harboard or persons acting with him in the promotion of the company. Sir Arthur
Aylmer was absolutely ignorant of business. He only consented to act because he was
told the office would give him a little pleasant employment without his incurring any
responsibility. H. W. Tugwell was partner in a firm of bankers in a good position in
Bath; he was seventy-five years of age and very deaf; he was induced to join the board
by representations made to him in January, 1906. Barber was a rubber broker and was
told that all he would have to do would be to give an opinion as to the value of rubber
when it arrived in England. Hancock was a man of business who said he was induced
to join by seeing the names of Tugwell and Barber, whom he considered good men.”28

The learned judge added that duty of skill and care is not a fiduciary duty and can be defined
to be a duty based on delictual or aquilian liability for negligence.29 Thus, the courts based the
test for negligence on subjective indicators such as; skills, experience and the ability of the
director in question. The courts would thus look in a claim for breach of duty of skill and care.
The consequence is that the same resulted in unreasonable low standard of care for directors,

24
Ibid
25
Re Brazilian Rubber Plantations and Estate Ltd (1991) 1 Ch 425
26
Ibid
27
Vanessa Finch, ‘Company Directors: Who Care About Skill and Care?’ (1992) 55 The Modern Law Review
179-214
28
Ibid
29
Ex parte Lebowa Development Corporation Ltd 1989 (3) SA 71 (T)

6
meaning that the more inexperience a director was the lower the standard of care that was
accorded to that director.30

In terms of qualification for a director, a director, one will note that a director does not need to
have any special qualifications to hold office. Directors are also not members of any
professional body and as such no objective standard of skill is thus applicable to directors. It is
crucial to note that there is a difference between care and skill, however the same is not easily
distinguishable. The distinction was laid down in the case of Deliotte Haskins & Sell v
Anderson,31 in which the court stated that skill referred to the knowledge and experience that a
director brings to his office. Skill therefore would mean the technical competence of a director,
while care is the manner in which the skill is applied. Therefore, care maybe objectively
considered, however skill varies from person to person.32

The common law regime required a director in the performance of the director’s duty to
exercise skill and care, take measure that would be expected of a person with his or her
knowledge and experience. This was illustrated in the case of Re City Equitable Fire Insurance
Co. Ltd.33 In this case, a company had suffered a shortfall in its funds as a result of the
managing director being convicted of fraud. The liquidator attempted to hold the remaining
directors liable for the failure to detect fraud of the managing director. The liquidator was
successfully in his claim against the directors. However, the directors the directors were
exempted from liability with a clause from the company constitution.

Romer J, held that directors have a duty to use the degree of care which an ordinary man might
34
be expected to take in the circumstances. The learned Judge added that a director need only
to exhibit the skill of a person of his knowledge and experience. Nonetheless, even though the
learned judge seemed to have introduced the objective attitude towards director duty of skills
and care, the directors were only required to apply the skills they posses. This meant that there
was a transformation of the prima facie objective test that took into consideration not only the
directors’ particular position in the company, but also the directors intelligence and experience.

30
Cassim FH et as Contemporary Company Law (2nd ed 2012) 558
31
Deliotte Haskins & Sell v Anderson (1995) 16 ACSR 607
32
Daniels v Anderson (1995) 16 ACSR
33
Re City Equitable Fire Insurance Co. Ltd (1925) Ch 407
34
Ibid

7
The rationale for the approach is that it is the shareholders fault if they appoint incompetent
directors.35

The lenient approach on the duty of directors seemed to be based on the idea that directors were
benevolent amateurs, who lacked special skills, and thus they could not be expected to maintain
involvement in company affairs and exercise the care and skill similar to that of a
professional.36 As Romer J stated, the duties of a director were intermittent, as at common law
a director was not bound to give continuous attention to the company’s affairs. 37 In, Fisheries
Development Corporation of SA Ltd v Jorensen,38where the court was invited to make a
distinction between executive and non-executive directors. It The former was said to be under
a duty to exercise a higher standard of care either expressly or impliedly, while the latter was
not liable for mere errors of judgement, as he or she is not required to have any special business
acumen, expertise, intelligence or even experience in the business of the company. However,
a non-executive director was not to expected to accept corporate advice dimly even when the
same is given by a qualified person.39 The reasoning for the distinction was based on the
argument that an executive director is appointed by the company and therefore owes the
company a higher duty of skill and care, as they are appointed because of possessing certain
skills and experience that is suitable for that position. On the other hand, a non-executive
director, would not have such a heavy burden placed on him or her, as he or she is not required
to hold any special qualifications or skills.

The courts further approved the subjective test laid in the Re Brazilian Rubber and the Romer
J three principles which have been applied in a number of cases including the Fisheries
Development Corporation of SA and the same were laid down by Mr. P.J.S Hewett in
Commissioner of Assize in Flaghship Carriers Ltd v Imperial Bank Ltd. 40 In this case, the
learned judge found the directors liable and also laid down the principles governing their duty
of skill and care as follows:

1. Directors need not exhibit a greater degree of skill than may be reasonable be expected
from a person of similar knowledge and experience. Thus, one is expected to exercise

35
Re Forest of Dean Coal Mining Co (1878) 10Ch D 450 453
36
Re Faure Electric Accumulator Co (1888) 40 Ch D 141.
37
Ibid
38
Fisheries Development Corporation of SA Ltd v Jorgensen (1980) SA 156
39
Cassim FH et as Contemporary Company Law (2nd ed 2012) 558
40
Commissioner of Assize in Flaghship Carriers Ltd v Imperial Bank Ltd (

8
 the care that can reasonably be expected of a person with his or her knowledge or
expertise. In addition, the director would not be held liable for mere errors of judgment.
2. Directors are not bound to give contentious attention to the company affairs, i.e a
director’s duty are not of such intermittent nature and are performed at periodical board
meetings. Thus, this draws a distinction between full time executive directors and non-
executive directors. The former is subjected to a higher standard of skills and care is
presumed to have certain knowledge and skills with relations to the position, while the
latter is not bound to give continuous attention to the affairs of the company, and his
duties are of an intermittent nature.41
3. In respect of all the duties considering the exigencies of business and the articles of
association, may properly be left to some official. The argument is that a director in the
absence of suspicious grounds such as fraud is entitled to trust an official to perform
such duties honestly. This was illustrated in the case of Fisheries Development
Corporation of SA Ltd v Jorgensen. This is applicable where a director can trust the
company’s accountants, auditors or attorney or other such persons to perform their
functions properly and honestly. It should be noted that a director exercising reasonable
care would not accept information and advice blindly, but rather he or she should accept
it and rely on it provided he or she has given it due consideration and he or she has
exercised his or her own judgement on the aspect in question.42

In light of the attitude that the law took on the qualifications of directors and the time and
attention directors are required to devote their duties, that the law allowed directors to rely
heavily on information, advice and conduct of others within certain positions in the company
inevitable. Obviously, the fewer a director’s qualifications and the smaller the active part he
plays in the running of the company the greater will be his need to rely on others and the fewer
the grounds he will see for entertaining suspicion.

It is disputable that the larger the company, the greater the need for wide power of delegations
and the increasing chances of overreliance on other personnel in the office. If there was an
obligation on all directors to undertake personal responsibility for every aspect of a company’s
activities, this would, as the Earl of Halsbury pointed out in Dovey v. Cory,43 “ I cannot think

41
N Bouwman‘An appraisal of the modification of the director’s duty of care and skill’ (2009) 21(4) SA Merc J
509-534.
42
Ibid.
43
Dovey v. Cory (1901) A.C 477

9
that it can be expected of a director that he should be watching the inferior officers of the bank
or verifying the calculations of the auditors himself. The business of life could not go on if
people could not trust those who are put into a position of trust for the express purpose of
attending to details of management.”44

However, the degree of reliance a director is entitled to place on others goes further than just a
good deal of honesty and trust. There have been numerous cases where directors have been
held entitled to rely generally on the information of other personnel such as the executive
committees,45 chairperson of directors,46 managing directors,47 general managers,48 and the
chief executive officers.49 Furthermore, the reliance on other personnel may go further that
simply the assumption that the personnel are attending satisfactorily to the day-to-day details
of the management and may, in fact, embrace the actual policy making threshold of the
company. For example the questions on the amount of dividends to be declared and paid, 50 or
what other new forms of investment are to me made by the company,51 have been held to be
cases where directors may be entitled to act, without question, on the advice of others.

Undoubtedly, however, the general attitude the English law took on the question of reliance by
a director on the information and or advice or conduct of others person under his real was
accurately summed up in the following statement of Sir Arthur Wilson giving judgment for the
Privy Council in Prefontaine v. Grenier,52

“Attempts have repeatedly been made to render directors personally liable, on the
ground that they have trusted the regular authorised officers of the company; that they
have failed to detect and been misled by misrepresentation or concealment by such
officers when there was no room for doubting their fidelity. But such attempts have not
been successful.”

The Movement in the Common Law

44
Ibid
45
Land Credit Company of Ireland v Lord Fermoy (1869) L.R 5 Ch . App 764
46
Sheffiedl & South Yorkshire Building Society v Aizlewood (1890) 40 Ch. 412
47
Lucas v Fitzgerald (1903) 20 T.L.R
48
Re National Bank of Wales (1899) 2 Ch 629
49
Prefontaine v Grenier (1907) A.C 101
50
Lucas v Fitzgerald
51
Sheffiedl & South Yorkshire Building Society v Aizlewood
52
Prefontaine v Grenier

10
It is important to note that from the above discussions the English courts have in most cases
followed the “lenient approach” in holding directors accountable for their breach of duty of
care and skill. This is because that a subjective formula was used in testing a director’s
intelligence and experience. The English law has since evolved an imposed a more rigorous
duty of care on the directors duty of care and skill and have included both a dual objective and
subjective standard according to which the skill and care performed by the director could be
measured.

Vanesa Finch in her paper entitled “Company Directors: Who Cares about skill and Care”53
argues that the way common law has been structured, it tends to give directors room to run
companies without having the competence required. As long as their behavior does not fall
short of the “gross negligence test”, they will tend to avoid being held liable.Her paper is
focused in assessing the strengths and limitations of potential enforcers of duties of care and
skill.

Enforcement of standards demand not only information concerning the standard but factual
knowledge concerning the breach. She goes further to discuss in details about shareholders as
enforcers. She argues that, shareholders, as enforcers, are required to be provided with
documents such as company accounts and reports during annual meetings. Such information is
important in order to monitor the progress and performance of a company. This is an important
basis to scrutinize the performance of directors. Shareholders, once they get hold of such
important information, need to look into them and act appropriately. As Mr Sandland explaine
in the need to act;

“Increasingly institutional shareholders have come to recognize that they have the
obligation to all shareholders to attempt to bring about a change when a board singularly
fails in its responsibilities.”

Shareholders are viewed as passive investors who are purposed in monitoring the director’s
behavior. Financial creditors expertise is geared towards financial management and assessing
the risks involved in lending to corporate applicants. Trade creditors have hands on experience
in running business. Financial creditor may not sit and watch incompetence. Creditors attach
skills and care to the health of their investment and thus remain committed in monitoring the

Vanessa Finch, “Company Directors: Who Cares about Skill and care?” The Modern law Review, Vol. 55,
53

No. 2 (March 1992), pp. 179-214

11
activities of directors. The size of their monitoring is determined by the size of investment,
nature of any security, the type of business and etc. She goes further to discuss about other
enforces such as department and directors.

In her paper, Vanessa refers to the case of Re City fire Equitable Insurance Co.54 recognizing
the principle that Romer J applied in that case. She pays keen attention to the proposition made
by Romer J that a director need not exhibit in the performance of his duties “a greater degree
of skill than may reasonably be expected from a person of his knowledge and experience.”

Second, a director was not bound to give continuous attention to the affairs of his company but
was bound to attend all meetings he reasonably could. Nonetheless, it appears that court have
held that in the absence of any contract or provisions in the constitution of the company on the
time and attention to be devoted to duties, a director is not required to devote the whole or
indeed any particular part of his time to the company. 55 While the appointment of a director
does not in itself imply any obligations as to the time and attention which will be devoted to
company activities, it has been suggested that there is a minimum requirement that a director
attend most board meetings. Romer J in Re City Equitable Fire Insurance Company Ltd,56

“director is not bound to give continuous attention to the affairs of his company. His
duties are of an intermittent nature to be performed at periodical board meetings, and
at meetings of any committee upon which he happens to be placed. He is not, however,
bound to attend all such meetings, though he ought to attend whenever in the
circumstances he is reasonably able to do so.”

While the above quote seems to suggest liability on the part of the director who fails to
discharge his obligation on attendance of meetings whenever reasonably possible, in practice
the consequence of non-attendance at meeting seem much less important. This was illustrated
in the case of Marquis of Bute’s Case,57which showed that long periods of non-attendance on
the part of a director accrued no liability. In one case, Re Montrotier Asphatle Company, Boom
V.C sated that a director’s business or pleasure may call him elsewhere and it would be a most

54
Re Brazilian Rubber Plantations Estate L.T.D (1911) 1 Ch. D. 425,436, 437
55
Re Forest of Dean Coal Mining Company (1878) 10 Ch.D.
56
Re City Equitable Fire Insurance Company Ltd.
57
Marquis of Bute’s Case (1892) 26 ER

12
unheard of thing to say that if anything wrong was done at a board meeting he being named
among the directors but not present, he is liable for what is done in his absence.58

The law seems so firmly settled on this question that even where a director has been party to a
resolution initiating an ultra vires lending policy but has been absent from subsequent meetings
where specific loans have been made pursuant to the policy, he has been held not liable. 59 The
phrase ultra vires consists of two words: the former meaning “beyond”, the latter denoting
“power”. The expression ultra vires therefore means, an act carried out beyond the powers
conferred upon a person or a juristic person. It is important to acknowledge that ultra vires does
translate to illegality, although the consequences of both acts are void.

In the context of Company Law, the Doctrine of Ultra Vires refers to the limitation of a
company’s objects, stated in their constitution, that is, its Article of Association. This can be
achieved in two instances; where the company offends the principles of law concerning capital
and when the company goes against the objects of its memorandum.

Thirdly, a director, in the absence of grounds for suspicion was justified in trusting officials to
perform duties where he had allocated those duties properly. Vanessa is of the idea that there
is need to structure the corporate framework in manner that could allow monitoring to prevent
incompetence.

Blanaid Clarke in his Article “Duty of Care, Skill and diligence – From warm bath to hot
water”60 provides another framework of understanding the duty, skill and diligence of
directors. In his paper, Clarke review the framework of assessing the duty of care, skill and
diligence provided by Riley in his seminal article on “The Company Director’s duty of care
and skill: The case for Onerous but subjective standard.”

Clarke avers that the contribution that skilled, responsible and diligent directors make to the
success of a company is undoubted. Similarly, lack of such skills may harm the company and
community at large. This is because various reports have revealed that financial crisis of a
company, its failure in corporate governance are most of the time, to a large extent attributable
to Directors.

58
Re Montrotier Asphatle Company (1876) 34 L.T 716
59
Cullerne v. The London & Suburban General Permanent Building Society (1890) 25 Q.B.D. 485.
60
Blanaid Clarke, “Duty of care, skills and diligence – From warm baths to hot water.” Irish Jurist, New Series,
Vol.56 (2016), pp. 139-160
<https://www.jstor.org/stable/26447999?read-now=1#page_scan_tab_contents>

13
He reviews the historical background of the duty of Care from Several case laws in 19th century
such as Jackson v Muster Bank Limited61, Land Credit Co of Ireland v Lord Fermoy62and Re
Cardiff savings Bank63 and faults the low duty of care, skill and diligence that was exhibited
from such judgements. He appreciates the developments of the duty of care, skill and diligence
in case laws in 20th Century notably Re Brazilian Rubber Plantations and Estates Limited64
where the judge determined that the Directors were not guilty of negligence but mere lack of
sound commercial judgement. He faults this judgement by arguing that still this was a subject
approach that did little to raise the bar from earlier cases.

He reviews the expert evidence provided by the Australian Institute of Company Directors that
required assessing the extent to which a director may have fallen short of the mark to determine
whether or not they are liable of negligence. Throughout his paper, she is of the view that there
is need for a proper framework for assessing the duty of care, skill and diligence for directors.

Trebilcock, in his paper, “The liability of Company Directors For Negligence” explores the
duty of directors in the context of negligence. In his paper, Trebilcock avers that directors owe
a duty of care to company and shareholders. This duty of care requires them to act with
reasonable care, skill and diligence when carrying out their work and responsibilities. His paper
specifically addresses the need to make informed judgement and decisions for the best interest
of the company.65

The Modern approach- Cases decided after the landmark decision in Donoghue v
Stevenson

Dual Subjective and Objective Test.

The common law applied a lenient approach in holding directors accountable for their breach
of their duty of skill and care as a consequence of the subjective test that was limited to the
director’s skill and experience. This approach was adopted by both the English common law
and the Kenyan law in holding that directors need not have any special qualifications to hold
office. Nonetheless, this approach was inevitable be bound and to be replaced by a more

61
Jackson v Munster Bank Limited [1884]
62
Land Credit Co. of Ireland v Lord Fermoy [1869] L.R 5 Ch. App 323
63
Re Cardiff Savings bank [1892] 2 Ch. 100
64
Brazilian Rubber Plantations Estate L.T.D (1911) 1 Ch. D. 425,436, 437
65
M.J Trebilcock, “The liability of Company Directors for Negligence.” Modern Law Review, Vol.32 No. 5
(Sep. 1969), pp. 499-515(17 pages)
<https://www.jstor.org/stable/1094241?read-now=1#page_scan_tab_contents>

14
rigorous approach. This involved the introduction of a further (objective) test which would
assess the director’s conduct against that of a reasonable person.66

The case of Dorchester Finance Co v Stebbing,67 was considered to be the first case to apply
the modern approach as the court acknowledged that the traditional subjective test of the breach
of the duty of care and skill was not sufficient to determine a director’s liability. 68 The court
held that the principles laid down in Re Equitable Fire Insurance, were only concerned with
the application of the skill. The court attempted to set a distinction between the manner in
which the director applies his skill from his duty of diligence by providing that the former is
subjective test which considers the technical expertise while the latter is an objective standard
which considered the ‘how’ part. The court stated that the objective standard tested how an
ordinary manner would be required to act in the circumstances of the case.

John Lowry addresses the issue of the Duty of care, Skill and Diligence in his paper “The
Irreducible Core of the Duty of care, skill and Diligence.”69 His arguments are premised on
70
the case of Australian Securities and Investment Commission v Healy which touches the
issue of directors exercising their role of ensuring accurate disclosure of financial information
of a company. He argues that directors, by ensuring that they provide “true and fair” view of
company’s accounts, such accurate and precise information will be very helpful to
shareholders, creditors and government agencies who primarily serve as monitors of corporate
management. He specifically emphasizes that directors need to comply fully with the
requirement of providing accurate disclosure of financial information. They must be careful
and diligent when making approvals of accounts and reports and they must take all reasonable
steps to comply with the statutory requirements and be diligent enough to identify some
deficiencies in the accounts and reports and immediately inquire about them.

According to John, a director is required to behave as a reasonably diligent person having both
the general knowledge, skills and experience that may reasonably be expected by virtue of his
position as a company director and should poses the general knowledge, skills and experience

66
Chris Riley, ‘The Company Director’s Duty of Care and Skill:The Case for an Onerous but Subjective
Standard,’ (1999) 62 (5) The Modern Law Review 697
67
Dorchester Finance Co v Stebbing (1989) BCLC 498
68
Ibid.
69
John Lowry, “The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors:
“Australian Securities and Investment Commission v Healy.” The modern Law Review, Vol. 75, No. 2 (March
2012), pp. 241-261.
70
Australian Securities and Investment Commission v Healy [2011] FCA 717

15
that a director must have. He adds further that a director must poses at least a minimum
standard of financial competence in order to reach informed opinion about the company’s
financial position.

He argues that the field of commerce has undergone gradual development and has become
complex. Therefore, whatever is expected from directors may be more that what was formerly
expected. In particular, a time has reached when directors are expected to be capable of
understanding the affairs of the company to the extent of being able to make reasonably make
informed opinion of its financial capacity. 71 Directors must be very careful whenever they
handling accounts and reports so that they can be able to detect and identify some discrepancies
in such important documents. Failure to do so will be a breach to their statutory requirements
of exercising reasonable care and diligence when approving such important financial
documents.

Nonetheless, the distinction between the subjective and objective standard test is not easy to
come by. In Norman v Theodore Goddard,72the court adopted the opinion that all elements of
the duty if care and skills are to be assessed objectively and not subjectively. The objective
standard required that a director should exercise his duty in the same manner as a reasonable
person carrying our similar functions would and the subjective requirement that consideration
would be given to the general skill, knowledge and experience that the director possesses. Thus,
a director who undertakes the management of a company is expected to exercise reasonable
skills in property management, but not in tax evasion.

Despite the advancement of the standard on director’s duty on skill and care as stated in the
Norman v Theodore Goddard case, there is confusion as to the exact standard of care that is
expected of director. Critics saw the case as demanding more duty of care and the concern was
that the severity of the standard would dissuade competent persons from acting as directors. 73
The UK, Law Commission in its 2001 final report identified the issue of clarity of the nature
of the standard of skill and care required from directors as one of its main objectives under the
director’s duties codification.74 In Australia, the standard of care and skill was based on the
subjective standard test until the famous case of Roger CJ in AWA v Daniels,75 where the court

71
Ibid
72
Norman v Theodore Goddard (1991) BCLC 1028
73
Irene-Marie Esser & John Coetzee ‘Codification of Directors’ Duties,’ (2004) Juta’s Business Law 12
74
Modern Company Law for a Competitive Economy. Final Report (London DTI, July 2001)
75
AWA v Daniels (1992) 7 ACSR 759

16
introduced the minimum objective standard to be observed by company directors. The court
held that the directors were required to possess a minimum degree of competence to allow them
exercise an informed and active direction and to acquired basic and reasonable understanding
of the company’s affairs.

Having considered the above one needs the to evaluate the degree of care and skill that is
required of a director. William states that the imposed a heavy duty on the directors to act
honestly but paid little attention in relation to the skill and diligence with which the director is
required to perform his duties.76 He proposes various reasons as follows:

1. A director is not an actual employee of a company as he or she has no contract with a

company, and therefore a contractual implication that he or she is to act with the skill
of an ordinary employee under contract is required to posses or even the required
diligence that an employee is required to exercise. This means that while a director has
no contract with the company, it is insurmountable to imply that there is a contractual
promise by such a director that he will act diligently or with the required skills.77
2. The company shareholders are a liberty to elect a director who has no knowledge or
experiencing in the running of a company. Thus, it makes it difficult for the court to fit
in the shoes of the shareholders and gauge their standard of care and skill expected from
the appointed director. This is because a director is not considered as a member of any
association, and therefore a court cannot measure the degree of negligence against a
‘reasonable director’. Further a director is appointed by a majority vote and does not
require any experience or skill to be appointed to that position. William gives an
example of a medical practitioner. He argues that in the case of a medical practitioner,
a court when judging such a person and determining whether the actions of such person
was negligent or not would look at whether there was negligence whilst in the midst of
the profession. By looking at this a court will be able to enquire whether the medical
doctor was negligent in the midst of his or her profession. Again in this regard Williams
has pointed out that while it is easier to measure a doctor’s negligence, although it
entails entrance examinations and practical experience, a director is not subjected to
such requirements.78

76
RC Williams Concise Corporate law and Partnership Law 3rd ed (2013) 179.
77
Ibid.
78
Ibid

17
 3. Further, he states that it easier for judges to assess whether a director acted honestly or
not , however, it is difficult for a director to determine whether a director acted
negligently or noted. This was also stated in the case of Re City Equitable Fire
Insurance Co Ltd. The principles laid down in the case became the common law
principles which proposed bot the subjective and objective test.

The standard of care illustrated by the above cases is both a mixture between objective and
subjective factors.79 Thus, it is seen that the minimum standard is that of a prudent reasonable
person, but a director who has greater skills, knowledge and experience than the reasonable
person must give to the company the benefit of those skills and experience. 80 Therefore, a
director with 20+ years of experience will ne judged according to the standards of a director
with 20+ years of experience and thus consider subjective factors as well. While making the
considerations, it is important to note the view of Havenga, which states that there exist no
clear boundaries between the fiduciary duty and the duty of care and skill and that overlapping
can exist.81 This is because the company director is under a duty to act in the best interest of
the company and thus is why the overlapping created what is normally referred to as the
business judgment rule.82 It is with regards that even though the director is under liberty to re,ly
on information from others in respect to very specific and straightforward matters where the
particular dangers inherent in reliance should have been perfectly clear to any director, the
courts have held directors to be liable for negligence in certain instances. Thus, for example,
to entrust a person who is not a director, officer or even a shareholder of the company with the
uncontrolled power of drawing cheques on the company’s account has been held to amount to
actionable negligence.83

John Lowry provides the principles that should be observed when assessing the standard of
care for directors as per Pollock J. First is that Directors is under continuing obligation to keep

79
MM Botha ‘The role and duties of directors in the promotion of corporate governance: a South African
perspective’ (2009) 30(3)
80
Ibid
81
M Havenga “The business judgement rule – Should we follow the Austrialian example?” (2000) 21 SA Merc
LJ 25.
82
JJ Du Plessis ‘A comparative analysis of directors’ duty of care, skill and diligence in South Africa and in
Australia: Corporate governance and mergers & take over’s: part II’ 2010 Acta Juridica 263-289.
83
Gould v Mt. Oxide Mines Ltd. (1916) 22 C.L.R 490, 530

18
informed about the activities of the Corporation. 84 Secondly, directors have an obligation to
monitor managers and practices to monitor whether business methods are safe and proper.85

Lastly, directors must maintain familiarity with financial status of the company by reviewing
regularly the financial statements of the company and consequently inquire further into matters
revealed further by those statements. Failure to do so may not be considered as mere technical
oversight but will result to a liability on the part of the director. 86

Middleton J on the other hand argues that A board should be established which enjoys the
varied wisdom, experience and expertise of persons drawn from different commercial
backgrounds.87 Even so, a director, whatever his or her background has a duty greater than that
of simply representing a particular field of experience and expertise. A director is not relieved
of the duty to pay attention to the company’s affairs which might reasonably be expected to
attract inquiry, even outside the director’s expertise. He concludes by stating that case law
indicates that there is a core, irreducible requirement of directors to be involved in the
management of the company and to take all reasonable steps to be in a position to guide and
monitor. There is a responsibility to read, understand and focus upon the contents of those
reports which the law imposes a responsibility upon the director to approve or reject.88

He emphasizes that Directors need to personally read the contents of financial statements for a
higher and very important purpose; to ensure as far as possible and reasonable, that the
information included there in is accurate. That is the minimal a person in the position of a
director should take before participating in the approval or adoption of financial statements and
their own directors reports.89

It can be seen that the standard of care required by directors in approving financial statements
is non-delegable. This is in line with the increasing strictness in which courts view the standard
of care of modern directors. Lord Goldsmith argues that the duty does not prevent a director
from relying on the advice or work of others, however, the final judgement must be his

84
John Lowry, “The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors:
“Australian Securities and Investment Commission v Healy.” The modern Law Review, Vol. 75, No. 2 (March
2012), pp. 241-261.
85
Ibid.
86
Ibid.
87
ASIC v Healey (2011) 196 FCR 291, 427
88
Ibid
89
Ibid

19
responsibility.90Lord Woolf, on the other hand states that a proper degree of delegation and
division of responsibility is of course permissible, an often necessary, but total abrogation of
responsibility is not.91

Codification of the Directors’ Duty of Care and Skill

Total Codification versus Partial Codification

The concept of total codification was clarified in the English case of R v Morris,92 where a
provision on the standards of conduct expected of directors was intended to replace common
law. Statute must expressly provide so. Alternatively, it must be read from the statute that its
drafters intended that the provisions therein be read exclusively from common law provisions.
Byles J. in the aforementioned case stated that a principle provided in statute should be
construed in conformity with the principles in common law unless there is an express intention
of the statute to totally depart from common law.

There are disadvantages of total statutory codification of directors’ duties and entirely replacing
them with common law. The argument is that it posses a risk of losing the wealth of knowledge
that has been developed over the years. Furthermore, over simplifying the principles by way
of codification would not assist in complex cases. The support for the common law approach
is based on the argument that common law has been applied and tested for many years and that
it has withstood the test of time and has had the effect of sealing the loopholes that present
themselves in complex scenarios.

Opponents of total codification argue that the same might not be effective in every scenario.
Thus, they propose partial codification. Partial codification has been defined as the general
introduction of general principles of law into statute while at the same time leaving some room
for flexibility of the development of common law by application of relevant legal system.93The
advantage of partially codifying a common law duty is that it does not entail growth of the
corresponding common law of duty of care and skill. In addition, the partial codification allows
common law principles to govern situation which have not been provided under statute.

90
Leung and Webster, “Directors’ Duties, Financial Literacy and Financial Reporting After Centro” (2012) 30
Comp & Sec LJ 100, 106–7.
91
Ibid.
92
R v Morris (1867) 1 CCR 95
93
Lindi Le Roux Coetzee and Van Tonder, ‘Advantages and Disadvantaged of Partial Codification of
Directors,’ Duties in the South African Companies Act 71 of 2008

20
On the other hand, the disadvantage of partial codification is that the co-existing principles do
not necessarily resolve issues regarding uncertainty or clarity to the directors, members of the
company as well as other stakeholders. 94 Since the common law and equitable principles gave
all been retained in various jurisdictions in relation to interpretations of issues by courts, it
seems that there may be more complexity in regards to duties than previously thought.95 Since
the provisions of directors duties of care and skill are now provided under statute, it may appear
easy to simply refer to a statute, however, legal clarity is only guaranteed to the extent that has
been provided under statute.96 Further, statue can only provide clarity to a certain limited
extent.97 In addition, over-codification may over-legislate and therefore creating more
confusion rather than clarity, which in the end may force the court to return back to the
application of the common law principles on the duty of care and skills. The extensive
application of the general principles of common law on the duties of directors cannot be simply
reduced into several sections in a statute and be expected to form a substantive reference to
those duties.98

Kenyan Case.

Prior to the enactment of the Companies Act, 2015, it was generally accepted principle that a
director has a duty to undertake all actions and make decisions in good faith for the benefit of
the company.99 In exercising his powers, a director was expected to exercise some care and
skill. 100 In Kenya, common law is recognized as a source of law under the Judicature Act Cap
8 Laws of Kenya. The director’s duty of skill and care is originally based on the English
Common Law. The common law duty of care provided directors with a wide range of
discretionary powers and as such a director of a company may not know what is expected of
the duty to be exercised as the same were not concise and certain. 101 Prior to 2015 Kenyan
courts have applied the lenient and hands-off approach when deciding company law matters
that relate to internal management of a company as evidenced in the case of James Orina &

94
Cassim Farouk, Maleka Femida Cassim, Rehana Cassim, Contemporary Company Law, (2nd edn, Juta Law,
2012)
95
Ibid
96
M Havenga “The business judgement rule – Should we follow the Austrialian example?” (2000) 21 SA Merc
LJ 25
97
Ibid.
98
Ibid.
99
Kiarie Mwaura, ‘Company Directors’ Duty of Skill and Care: A need for Reform.’ (2003) 24 (9) Company
Lawyer 283
100
Ibid
101
Ibid

21
 102
Another v Kenya Tea Development Company & Another, where the court stated that the
courts are ill equipped to meddle into the affairs of companies especially where the dispute
involves internal management and operations of a company which are administrative in nature.

Nonetheless, in recognition of the consequence of the subjective test, the Kenyan parliament
enacted the Companies Act No 17 of 2015. Section 145 of the Act provides for the director
duty of skill and care. The section states that in performing the functions of a director, the
director shall exercise the same skill and care that would be exercisable by a reasonable diligent
person. Section 145 seems to introduce an objective test in measuring a director’s duty of care
and skill alongside a director with the general knowledge skill and experience that would be
expected of such a director. The Act seems to shift from a pure subjective approach to a dual
approach of the duties of a director. However, the application of the said provision is still under
the umbrella of the courts.

It is not crystal clear whether the codification of the duty of ‘care’ and ‘skill’ under the
Companies Act 2015 envisaged as one term or whether the drafters of the Act acknowledged
the existence of a distinction between the two terms. The question is whether the same amounts
to different duties or there are to be seen as a set by set of each other. In the case of Daniels v
Anderson as discussed above the court established a distinction between ‘care’ and ‘skills.’ The
court stated that the latter means the knowledge and experience a director brings to the
performance of the director’s function and exercise of his powers, i.e ‘skill’ is the technical
competence of a director acquired through special training and experience. On the other hand,
‘care’ is the manner is which the skill is applied, i.e the how part. It is also important to note
that ‘care’ may be objectively assessed, while ‘skill’ varies from one person to another.’ This
understanding appears to be recognized by the drafter of the Act as there is a clear distinction
between the expectations of the directors under section 145 (a) and those under section 145 (b).

South African Case.

In the case of South Africa, Section 76 (3) (iii) of the 2008 Act requires that a director of a
company must exercise the powers and perform the functions of a director with the degree of
care, skill and diligence that may be reasonably be expected of a person carrying out the same
functions in relation to the company and having the general knowledge, skill and experience

102
James Orina & Another v Kenya Tea Development Company & Another Civil Appeal No 222 of 2004

22
of that director. Subsection VII provides that a director can demonstrate the exercise of skill
and care in the best interest of the company if:

a. The director has taken reasonably diligent steps to become informed about the matter;
b. The director either did not have any interest in the matter being considered or declared
such an interest as required by section 75; and
c. The director made, or supported a decision made by a committee of the board, with a
rational basis for believing and did believe that the decision was in the best interest of
the company.

The above section evidently welcomes the statutory regime and criteria to be applied while
measuring the degree and standard of skills and care of a director. Williams,103 however, states
regardless of the statutory law being reformed so as to include the provisions of Section 76,
there is yet to be case law that surfaces and the courts have applied the codified laws relating
to the duty of care and skill required of a director. Nevertheless, regardless of case law,
Cassim,104 has considered the statutory regime, in relation not just to the extent of its
applicability but how the same should be considered.105

In terms of Section 76 (3) (c) , the 2008 Act, the said section imposes a less subjective test and
provides for a more demanding standard of care on directors of the company, than what the
common law prescribed.106 This is as a result of the section imposing a more demanding
standard of care, as one will be measured against a director that has the same knowledge and
experience of that director. The section invites the dual test when evaluating the standard of
care of a director duty of skill and care i.e a director must exercise the powers and perform the
functions of a director, with the degree of care, skill and diligence that may reasonably be
expected of a person, carrying out the same functions in relation to the company as those carried
out by the director and has the knowledge, skill and experience of that director.107

In addition, Cassim notes that Section 76 borrows from the modern approach of the test for
skill and care in that it contains the elements of care and skill which are elements that have

103
RC Williams Concise Corporate law and Partnership Law (3rd ed, 2013) 179.
104
Cassim Farouk, Maleka Femida Cassim, Rehana Cassim, Contemporary Company Law, (2nd edn, Juta Law,
2012)
105
Ibid
106
J Cassidy ‘Models for reform: The directors’ duty of care in a modern commercial world’ (2009) 20(3) Stell
L R 373-406.
107
Ibid.

23
been kept from the common law, while at the same time, the section provides for a certain
degree of consideration to be applied when measuring the conduct of director with that of a
reasonable person who has knowledge and experience and thereafter a liability for negligence
can be deduced.

Cassim further notes that Section 76 provides for a twofold standard. The twofold standard,
according to McLennan,108 the objective and subjective test can be deduced from 76(3)(c)(i)
and (ii) of the Companies Act. The former being the minimum standard that all directors have
to meet, and the latter being the standard for directors who have more skill or experience than
expected in terms of the objective standard. 109 Thus, under the South Africa legal regime, a
director is expected to meet both the objective and subjective requirement. McLennan notes
that subsection 76(3)(c) in certain degree transforms the objective test into a subjective test by
considering the director’s intelligence and experience. 110 The limitation is that the ‘reasonable
directors’ test is limited to that of a person ‘having the general knowledge, skill and experience
of that director.’

In terms of the subjective test, which can be referred to in section 76(3)(c)(ii), which requires
that in evaluating the duty of the director in question, a court is mandated to consider the
knowledge skill and experience of the director. Thus, the subjective test means that a director
who possess any special skill or is more experience or knowledgeable, the same will be
considered when measuring the director conduct against a higher subjective standard. 111 The
same applies to inexperienced directors.

However, Cassidy notes that the wording section 76(3)(c)(ii) undermines the objectivity of the
skills test by asserting that the directors need only meet the standard of a reasonable person
having the skill and experience of that director, and thus transforms the objective standard test
of skill into a more subjective standard and as such is in appropriate in the modern commercial
world.112 He states that in light of the ambiguity of section 76(3)(c)(ii), courts will be forced to
substitute the legislative text with that of the subjective common law standard. He proposes

108
L McClennan “Directors’ fiduciary duties and the 2008 Companies Bill” 2009 TSAR 186
109
Ibid.
110
Ibid
111
Cassim Farouk, Maleka Femida Cassim, Rehana Cassim, Contemporary Company Law, (2nd edn, Juta Law,
2012)
112
J Cassidy ‘Models for reform: The directors’ duty of care in a modern commercial world’

24
that section 76 (3) should have explicitly imposed an objective standard of conduct that is not
qualified by the particular director’s personal skill and knowledge. 113

Nonetheless, Cassim states that section 76(3)(c)(i), is the best adopted approach as it is both
one that is equitable and fair in the circumstances. In qualifying his point, he is of the view that
such contention can be anchored by the fact that the test that is applied is measured against the
standard that may be reasonable expected of a person in the same position as the director. 114
He further states that the provisions of section 76(3)(c)(i) and (ii), now outline the objective
standard as the minimum standard with which all directors are to be measured against and are
expected to comply with. Therefore, the key standard in determining whether a breach of duty
has occurred is the objective standard of a reasonable person in the same position as the director
in question.

Section 76(3)(c) of the South Africa Company Act, also indicates a clear distinction between
an executive director and a non-executive director, and thus requires a different approach while
gauging the standard of care. The distinction was discussed by the King Report on Corporate
Governance,115 which contained a code of good practice that accentuated director’s
responsibilities in reference to corporate governance. The reports are not prescribed by law,
but offer some guidance on how to achieve good corporate governance. Although both
directors are bound by the duty of care and skill, the executive director attracts a higher standard
of care and skill compared to that of a non-executive director. The rationale is that the latter
performs their duty intermittently and have limited access to the books and records than the
former.116

Conclusion

Codification of the director’s duty of care and skill has not expressly excluded the provisions
of the common law but has provided the application of the common law rules and that any rules
of interpretation that are developed should be in line with the corresponding rules at common
law and general principles of equity.

113
Ibid.
114
Ibid
115
The King Report on Corporate Governance for South Africa (1994); The King Report on Corporate
Governance for South Africa (2002) (King II).
116
Ibid.

25
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