Directors’ duties

When an individual accepts the role of company director, they are accepting a significant responsibility. Directors are subject to legal duties, and failure to properly understand and comply with these duties can have consequences not only for the company, but for the director themselves.

This article outlines the Companies Act 2006 (the “Act”) directors’ duties and suggests some practical steps that directors can take to ensure that they understand their responsibilities and stay compliant.

Who is a director?

There are four main types of directors, and they are all subject to the same legal duties under UK company law. 

• Executive director - this is the most obvious type of director. These directors are typically employed full-time and are involved in the day-to-day management of a company’s business. 
• Non-executive director - these directors are not involved in the day-to-day management of a company.  They are usually part-time and tend to be appointed because they have a particular skill or sectoral insight that they can contribute to the company. The role of an NED is to offer an independent viewpoint and to constructively challenge management, where needed. 
• De facto director - this is someone who has assumed responsibility to act as a director, despite having never been actually or validly appointed as one. There is no one decisive test for identifying a de facto director, each case very much turns on its facts. Whether or not the individual holds themselves out as a director (or the company holds them out as a director) is relevant but not decisive. A key factor, however, is that the person undertakes functions in relation to the company which could properly be discharged only by a director.  
• Shadow director - a shadow director is a person who is not officially appointed as a director of a company but in accordance with whose directions or instructions the directors of a company are accustomed to act.  Shadow directors are subject to the same legal duties as other directors because they often have real influence over the corporate affairs of a company. 

Where do directors’ duties come from?

Before the Act, directors’ duties were largely derived from common law. These common law duties and sources remain relevant today because they can be used to interpret the meaning and application of the duties codified in the Act.  It is also important to note that not all duties were codified, so some uncodified, common law duties do still apply.

Duties imposed by the Act

Section 171 (duty to act within powers) - a company’s constitution (articles of association, shareholders’ agreements and shareholders’ resolutions) sets out the powers given to directors in relation to the running of the company. Directors should only exercise powers for the purposes for which they are conferred.

Section 172 (promote the success of the company) – ‘success’ is determined by the company’s shareholders, however, generally, it means the long-term increase in value of the company. To comply with this duty, directors must act in a way they consider in good faith will be most likely to promote the success of the company for the benefit of its shareholders as a whole. To do this, directors must have regard to:

• the likely consequences of any decision in the long term
• the interests of the company’s employees
• the need to foster the company’s business relationships with suppliers, customers and others
• the impact of company operations on the community and the environment
• the desirability of the company maintaining a reputation for high standards of business conduct
• the need to act fairly as between the shareholders of the company

It is important to note that, in certain circumstances, directors may be required to also consider the interests of creditors. In its decision in BTI 2014 LLC v Sequana SA [2022] UKSC 2, the Supreme Court held that the point at which this “creditor duty” is triggered is when the directors know, or ought to know, that the company is either insolvent, bordering on insolvency or insolvent liquidation or administration is probable. 

The Sequana case was the first time that the UK’s highest court has been asked to consider the nature, scope and content of directors' duties to creditors when a company is nearing insolvency. As this is a developing area of law, where a company is in financial difficulty, directors should seek independent legal advice as early as possible to help them navigate their legal duties under the Act and insolvency legislation.

Section 173 (duty to exercise independent judgment) - directors must not allow their personal interests to affect the exercise of independent judgment. Directors may still rely on advice; however they must exercise their own judgement in deciding whether to follow the advice. Where a director is a nominee of a shareholder, they may take the shareholder’s interests into account however the decision made must be genuinely considered by the director to be in the best interests of the company. Similarly, where the company forms part of a group of companies, the interests of that group may be considered, provided that the intended measure promotes the success of the company for the benefit of its shareholders as a whole.

Section 174 (duty to exercise reasonable care, skill and diligence) – directors must exercise a level of reasonable care, skill and diligence that would be exercised by a reasonably diligent person with:

• the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by the director in relation to the company (“Objective Test”)
• the general knowledge, skill and experience that the director actually has (“Subjective Test”)

Therefore, at a minimum, a director must display the knowledge, skill and experience set out in the Objective Test, but where a director has specialist knowledge, skill or experience (for example, where a director is a qualified accountant), the higher, Subjective Test must be met. In applying the Subjective Test, regard must be had to the functions of the particular director, including their specific responsibilities and the circumstances of the company.

All directors should attend board meetings, ensure relevant information is suppled to them, take an active interest and keep themselves informed about the affairs of the company. 

Section 175 – (duty to avoid conflicts of interest) - directors must avoid situations in which they have or can have direct or indirect interests that conflict with, or possibly may conflict with, the interests of the company. The duty applies in particular in relation to exploitation of property, information or opportunity. Where there is a conflict of interest, it can often be authorised, except where company’s articles of association prohibit this. Recent case law has suggested that this duty may continue after a person ceases to be a director as regards the exploitation of any property, information or opportunity of which they became aware when they were a director and may be breached by actions which take place entirely after a person has ceased to hold office.

Some steps to assist directors in complying with this duty are:

• ensuring that the company maintains an up-to-date register of directors’ interests
• disclosing any potential conflicts for authorisation on appointment
• bearing in mind their other directorships and connected persons
• taking legal advice
• disclosing any potential conflicts for authorisation and noting these in the board minutes for the meeting
• in the context of group companies, always being conscious of which company they are making a decision on behalf of

This section 175 duty is distinct from the duty to avoid conflicts of interests in transactions or arrangements (contained in section 177 and discussed below). 

Section 176 (duty not to accept benefits from third parties) – directors cannot accept any benefit from a third party as a result of their role as a director, or as a result of any act (or lack of action) as a director.  “Benefit” is not defined in the Act, but should be given its ordinary dictionary meaning (for example, gift, advantage, profit or favourable factor or circumstance). In UK company law, there is no minimum threshold for this duty, meaning directors must consider whether any benefit of any size would contravene this provision.  Where the benefit does not give rise to a conflict of interest (such as a benefit without expectation of anything in return), then there will be no breach of section 176. Benefits received cannot be authorised by the board of directors, but they can be approved by the shareholders.

Section 177 (duty to declare interest in proposed transaction or arrangement) and section 182 (duty to declare interest in existing transactions or arrangement) – a director, who is in any way interested in a proposed or existing transaction or arrangement with the company, must declare the nature and extent of that interest to the other directors. These duties apply to direct, as well as a direct, interests. So, for example, if a director’s spouse is to enter into a transaction with the company, the director must disclose that interest. Failure to comply with section 182 is a criminal offence. For both sections, there is no breach if the director is not aware of the interest, transaction or arrangement and the matter is not something they ought reasonably to have been aware.

No declaration is required where:

• the interest cannot reasonably be regarded as likely to give rise to a conflict
• it concerns the terms of the director’s service agreement which have been considered by the board or
• the other directors are already aware or ought reasonably to have been

A company’s articles of association should stipulate whether or not an interested director can participate and vote in meetings.

Who are the duties owed to?

Generally, directors’ duties are owed to the company, but directors must have regard to the interests of shareholders.  Additionally, as discussed above in relation to the section 172 duty, in certain situations consideration should be given to other stakeholders to include in the context of companies in financial difficulty / prospective insolvency, the interests of creditors.

What are the consequences of breach?

In addition to the reputational damage associated with claims in respect of breaches of directors’ duties, other potential consequences are:

• liability for legal costs (including those of the successful claimant)
• awarding of injunction against the director to prevent them from carrying out a breach or from continuing one
• order that a transaction be set aside
• order that a contract be rescinded
• restitution order (requiring the director to return personal profits to the company)
• order that the director return property to the company
• order requiring the director to account for improper profits
• order requiring the director to pay damages or equitable compensation to the company
• termination of the director’s service contract
• disqualification of the director from acting as a director
• in the case of breach of section 182 and insolvency-related obligations, potential criminal penalties

How can directors and companies stay compliant?

Below are some practical steps that directors can take to help them stay compliant with their directors’ duties:

• take time to truly understand their role, duties and constitutional framework (articles of association and any shareholders’ agreements), seeking independent legal advice where required
• participate in induction (and ongoing) training
• keep up to date with developments affecting the affairs of the company and ensure relevant information is supplied to them
• reflect on their duties when setting, updating and implementing company strategy
• attend board meetings, read board packs in advance and ensure objective decision making by the board
• ensure material decisions are documented and include evidence of consideration of directors’ duties and the impact on shareholders (and, where relevant, creditors and other stakeholders)
• for significant or potentially controversial decisions, management should prepare briefing papers
• consider directors and officers liability insurance (this can be purchased in connection with negligence, breach of duty or breach of trust, however the policy will not cover fraud, dishonesty, wilful default or criminal behaviour

 For more information please contact Sarah Dugdale, Partner, Anna Cartwright, Senior Associate, Andrew McClintock, Solicitor, or your usual ALG Corporate Team contact.

Date published: 9 April 2025