The duty of reasonable care, skill and diligence

Q: How does this work in practice?

Illustration only. Priya is a director of a small design company run by her business partner, who handles all the money. Priya's background is creative. For two years she signs the annual accounts without reading them and never asks for management accounts. The company stops paying its VAT and later enters insolvent liquidation. Priya's lack of financial training does not change the objective limb: a reasonably diligent director of a small company would have looked at the accounts, asked how tax liabilities were being met and noticed the arrears. Had Priya asked for a simple monthly summary of cash, debts owed and tax due, queried it at board meetings and minuted her questions, she would have been in a far stronger position, even if she relied on her partner for the detail.

Q: What happens if a director falls short?

Claims by the company. Section 178 says the consequences of breach are the same as under the corresponding common law rule or equitable principle. Section 178(2) treats section 174 differently from the other general duties: it is not enforceable in the same way as a fiduciary duty. Claims by shareholders. Section 260 allows a member to bring a derivative claim on the company's behalf for a cause of action arising from negligence, default, breach of duty or breach of trust by a director, including a former director. Insolvency. A liquidator may pursue a wrongful trading contribution under section 214 of the Insolvency Act 1986. Disqualification. Under section 6 of the Company Directors Disqualification Act 1986, a court must disqualify a director of an insolvent or dissolved company whose conduct makes them unfit. Schedule 1 includes any material breach of a legislative or other obligation of a director among the factors. See our guide to director disqualification. There are limited routes out. Members can ratify negligence by resolution under section 239, with the director's own votes disregarded; see ratifying directors' breaches. Under section 1157 a court may relieve a director who acted honestly and reasonably and ought fairly to be excused. A clause exempting a director from liability for negligence is void under section 232, although insurance for directors is permitted by section 233, as explained in our guide to director indemnities.

Section 174 of the Companies Act 2006 requires every director to exercise reasonable care, skill and diligence. The standard is measured against a reasonably diligent person with the knowledge and experience expected of anyone doing that director’s job, and also with the knowledge and experience the director actually has. A director with no financial background is still held to the minimum standard for the role, so not understanding the figures is not a defence.

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What does section 174 actually say?

Section 174(1) is one sentence: a director of a company must exercise reasonable care, skill and diligence. Section 174(2) then defines the standard. It is the care, skill and diligence that would be exercised by a reasonably diligent person with:

the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and
the general knowledge, skill and experience that the director has.

The duty is one of the seven general duties in sections 171 to 177, which section 170 says are owed by a director to the company, not to shareholders, creditors or employees individually. Under section 170(5) the general duties also apply to shadow directors where they are capable of applying. Our overview of directors’ duties under the Companies Act 2006 shows how section 174 sits alongside the other six.

How do the objective and subjective tests fit together?

The explanatory notes to the Act (paragraph 337) describe limb (a) as an objective test and limb (b) as a subjective test. The two are not alternatives. The imaginary reasonably diligent person is given both sets of attributes at once.

In practice that works in one direction only:

The objective limb sets a floor. It asks what can reasonably be expected of someone carrying out this director’s functions in this company. A finance director of a trading group is judged against what a finance director should know; a director responsible for sales in a small family company is judged against that role. A director who personally knows less than the role demands is still measured against the role.
The subjective limb can raise the bar. A director who is a qualified accountant, a lawyer or an experienced insolvency practitioner is expected to bring that knowledge to the board, even if their formal role is something else.

So a director cannot argue that they were new, untrained or out of their depth. That might explain the failure, but the objective limb still applies.

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Where did the test come from?

The explanatory notes (paragraph 336) explain that the courts traditionally used a purely subjective test, asking only whether a director showed the skill reasonably expected of someone with their own knowledge and experience. More recently the courts said the common law standard mirrors section 214 of the Insolvency Act 1986, which includes an objective assessment, and section 174 is modelled on that section.

Section 214(4) of the Insolvency Act 1986 uses the same two limb wording to decide what a director ought to have known and done when a company was heading for insolvent liquidation. Section 214(5) adds that the functions taken into account include functions entrusted to the director even if they did not carry them out. That is the provision behind wrongful trading claims, and it explains why the two duties are so often argued together after a company fails.

What does this mean for a director with no financial background?

The Insolvency Service’s director information hub is direct about this. Under the heading that a lack of financial knowledge is no defence, it says all directors are responsible for understanding and monitoring the company’s finances, including tracking cash flow, reviewing accounts and identifying early signs of financial difficulty. It adds that a director does not need to be a financial expert but must understand the basics and seek professional advice where needed.

The Companies Act builds the same expectation into specific obligations that every director shares:

Section 386 requires accounting records sufficient to disclose with reasonable accuracy, at any time, the financial position of the company, and to enable the directors to ensure the accounts comply with the Act. Section 388 makes those records open to inspection by the company’s officers at all times, so a director can always ask to see them. Our guide to a director’s right to inspect the company’s books covers how that works.
Section 393 says the directors must not approve accounts unless they are satisfied that they give a true and fair view. Signing off accounts a director has not read or does not understand is hard to reconcile with section 174.

For a director without a finance background, reasonable care usually means some combination of: asking for regular management information in a form you can follow, asking the accountant to walk the board through the year end accounts, querying anything you do not understand until you do, and recording those questions and answers in the board minutes.

Can a director rely on other people and delegate?

Yes, within limits. Under article 5 of the model articles for private companies, the directors may delegate any of their powers to such person or committee, to such extent and on such terms as they think fit, and may revoke or alter the delegation. The explanatory notes to section 173 (paragraph 335) confirm that the duty to exercise independent judgment does not prevent directors exercising a power to delegate conferred by the constitution.

Delegation does not hand over responsibility. The director information hub summarises the related duty of independent judgment as “take advice, but always make decisions for yourself”. A director who relies on a finance director, a bookkeeper or an external accountant is still expected to check that the person is competent, to receive enough information to monitor what is being done, and to act on warning signs.

Does it apply to non executive and inactive directors?

It applies to every director. The objective limb is tied to the functions the director actually carries out, so a part time non executive director is not expected to know everything an executive director knows. But the director information hub states that all directors share responsibility for the company even if not involved day to day, and that a director cannot avoid accountability by not taking part in decisions, having a limited or advisory role, or claiming lack of awareness. It says directors must take an active interest in the company’s affairs, monitor performance and risks and intervene when necessary.

A spouse or relative appointed to make up numbers, who never attends a meeting and never sees the accounts, is the classic example of a director exposed by section 174.

How does this work in practice?

Illustration only. Priya is a director of a small design company run by her business partner, who handles all the money. Priya’s background is creative. For two years she signs the annual accounts without reading them and never asks for management accounts. The company stops paying its VAT and later enters insolvent liquidation.

Priya’s lack of financial training does not change the objective limb: a reasonably diligent director of a small company would have looked at the accounts, asked how tax liabilities were being met and noticed the arrears. Had Priya asked for a simple monthly summary of cash, debts owed and tax due, queried it at board meetings and minuted her questions, she would have been in a far stronger position, even if she relied on her partner for the detail.

What happens if a director falls short?

Claims by the company. Section 178 says the consequences of breach are the same as under the corresponding common law rule or equitable principle. Section 178(2) treats section 174 differently from the other general duties: it is not enforceable in the same way as a fiduciary duty.
Claims by shareholders. Section 260 allows a member to bring a derivative claim on the company’s behalf for a cause of action arising from negligence, default, breach of duty or breach of trust by a director, including a former director.
Insolvency. A liquidator may pursue a wrongful trading contribution under section 214 of the Insolvency Act 1986.
Disqualification. Under section 6 of the Company Directors Disqualification Act 1986, a court must disqualify a director of an insolvent or dissolved company whose conduct makes them unfit. Schedule 1 includes any material breach of a legislative or other obligation of a director among the factors. See our guide to director disqualification.

There are limited routes out. Members can ratify negligence by resolution under section 239, with the director’s own votes disregarded; see ratifying directors’ breaches. Under section 1157 a court may relieve a director who acted honestly and reasonably and ought fairly to be excused. A clause exempting a director from liability for negligence is void under section 232, although insurance for directors is permitted by section 233, as explained in our guide to director indemnities.

What mistakes do directors make?

Believing that a title such as “creative director” or “non executive” removes responsibility for the finances.
Approving accounts without reading them, which sits badly with section 393.
Delegating to a bookkeeper or relative and never checking the output.
Assuming that resigning ends the risk. The director information hub warns that a director remains responsible for decisions and actions taken while in office.
Failing to minute questions and challenges, leaving no evidence that care was taken.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.