Re D’Jan of London [1994] 1 BCLC 561
Court: High Court
Facts: Mr. D’Jan, a director, signed a change to an insurance policy which was erroneously completed by his insurance broker, Mr. Tarik Shenyuz. The form was not read by Mr. D’Jan before signing, and it contained a mistake: it incorrectly answered ‘no’ to the question of whether he had previously been a director of a company that went into liquidation. As a result, the insurance company, Guardian Royal Exchange Assurance plc, refused to cover the £174,000 worth of stock destroyed by a fire at the company’s Cornwall premises. The company had entered into insolvent liquidation by the time Mr. D’Jan discovered the error. Liquidators sued Mr. D’Jan to recover the funds for the company’s creditors, alleging negligence and misfeasance under section 212 of the Insolvency Act 1986.
Issue: Whether Mr. D’Jan’s failure to read the insurance policy form before signing it constituted a breach of his duty as a director, and to what extent he should be held liable.
Held: The court held that Mr. D’Jan's failure to read the form constituted negligence, even though such oversight might be common among busy directors. However, his liability was reduced because he was primarily risking his own money rather than that of others.
Key Judicial Statement: Hoffmann LJ stated: “Mr Russen said that the standard of care which directors owe to their companies is not very exacting and signing forms without reading them is something a busy director might reasonably do. I accept that in real life, this often happens. But that does not mean that it is not negligent.” “The duty of care owed by a director at common law is accurately stated in sec. 214(4) of the Insolvency Act 1986. It is the conduct of a reasonably diligent person having both (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.” “Both on the objective test and, having seen Mr D’Jan, on the subjective test, I think that he did not show reasonable diligence when he signed the form. He was therefore in breach of his duty to the company.”
💡Leveluplaw: Directors are held to an objective standard of care based on what a reasonable director in their position would do, but this standard is raised if the director possesses special skills or knowledge. Even if common practice is to overlook details, directors must exercise diligence in their responsibilities.