Meaning
Fiduciary obligation requiring company directors to act with the competence and diligence expected of a person in their position. The duty of care and skill combines an objective test of what a reasonable director would do with a subjective test based on the actual knowledge and experience of the individual. It prevents management from acting with gross negligence or ignoring the financial health of the business.
Performance Standard
Professional directors with specific qualifications are held to a higher standard than those without relevant expertise. While the duty of care and skill does not require a director to be an expert in every field, it does require them to seek professional advice when the situation exceeds their personal competence. A failure to supervise the delegation of tasks can constitute a breach of this obligation.
Director Liability
Personal assets of a board member may be at risk if a breach leads to a quantifiable loss for the company. Indemnity insurance and exculpation clauses in the articles often provide a layer of protection against claims of simple negligence. However, no clause can fully shield a director who ignores obvious warning signs of fraud or insolvency.
Business Judgment
Courts generally avoid second-guessing the commercial decisions of a board if the process used to reach the decision was sound. The focus stays on the quality of the deliberation rather than the eventual success or failure of the venture. This protection ensures that directors are not deterred from taking reasonable commercial risks in pursuit of growth.
The principle balances accountability with the need for entrepreneurial action.
