Directors' Duties Under the Companies Act 2006 Explained

The directors' duties under the Companies Act 2006 are the seven general duties set out in sections 171 to 177, and they apply to every director of every UK company, from a single-director consultancy to a FTSE 100 board. They are owed to the company itself rather than to shareholders individually, they apply whether or not anyone has read them, and they are the legal spine underneath everything a governance framework tries to do.

Before 2006 these duties existed in case law, built up over more than a century of judgments. The Act codified them, which made them far easier to find and slightly harder to plead ignorance of. Section 170 makes clear that they are still to be interpreted in line with the common law rules and equitable principles they replaced, so the older cases still matter.

Who counts as a director

The duties are not limited to people with "director" on a business card. Section 250 defines a director as anyone occupying that position, whatever they are called. That catches:

De jure directors, formally appointed and registered at Companies House.
De facto directors, who act as directors without formal appointment.
Shadow directors, defined in section 251 as people in accordance with whose directions or instructions the directors are accustomed to act. The general duties apply to shadow directors where and to the extent that they are capable of applying.

The practical consequence is that a controlling shareholder or a founder who has stepped back but still directs decisions can carry director-level liability without ever being appointed. Job titles such as "sales director" that carry no board role do not, on their own, create the duty.

The seven general duties

Section 171: act within powers

A director must act in accordance with the company's constitution, principally its articles of association, and exercise powers only for the purposes for which they are conferred. The second limb is the interesting one. A power used for a proper purpose in form but an improper one in substance, for example issuing shares to dilute a troublesome shareholder rather than to raise capital, breaches this duty even if the articles permit share issues.

Section 172: promote the success of the company

The best known duty, and the one most often misquoted. A director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so they must have regard, among other matters, to:

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

Two points are commonly misunderstood. First, the test is subjective: what the director honestly considered, not what a court would have decided. Even so, a decision no reasonable director could have thought was in the company's interest invites the inference that it was not made in good faith. Second, these are factors to have regard to, not competing objectives to balance equally. This is often called "enlightened shareholder value": the members' benefit remains the objective, but the route to it runs through employees, suppliers, communities and reputation.

Section 172 shifts when a company approaches insolvency. Where insolvency is probable, the duty is modified so that creditors' interests must be considered, a principle the Supreme Court examined in detail in BTI 2014 LLC v Sequana SA in 2022. Directors of a company in financial difficulty should take advice early, because the moment this shift occurs is exactly when decisions are most likely to be scrutinised later.

Large companies must also publish a section 172 statement in their strategic report, under section 414CZA, explaining how directors have had regard to these matters.

Section 173: exercise independent judgement

A director must reach their own decisions. Taking advice is fine and often prudent, but delegating judgement is not. The duty is not infringed by acting in accordance with an agreement duly entered into by the company that restricts future exercise of discretion, or in a way authorised by the constitution. Nominee directors appointed by an investor or a parent company are the classic pressure point here: the duty is owed to the company on whose board they sit, not to whoever put them there.

Section 174: exercise reasonable care, skill and diligence

The standard is a dual one. It is what would be exercised by a reasonably diligent person with, first, the general knowledge, skill and experience reasonably expected of someone carrying out that director's functions, and second, the general knowledge, skill and experience that the director actually has.

The objective limb sets a floor that no director can fall below by pleading inexperience. The subjective limb raises the bar for a director who is a qualified accountant, lawyer or engineer. A finance director with an accountancy qualification is judged more strictly on the accounts than a colleague without one.

Section 175: avoid conflicts of interest

A director must avoid situations where they have, or can have, a direct or indirect interest that conflicts or possibly may conflict with the company's interests. It applies in particular to the exploitation of any property, information or opportunity, and it applies whether or not the company could itself have taken advantage of it. That last clause is strict: taking a corporate opportunity is a breach even where the company would have turned it down.

The duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict, or if the matter has been authorised by the directors. For a private company, the directors can authorise a conflict unless the constitution prevents it; for a public company, the constitution must expressly enable it. Interested directors do not count toward the quorum or the vote on their own authorisation. Section 176 adds a related duty: not to accept benefits from third parties conferred by reason of being a director, unless the benefit cannot reasonably be regarded as likely to give rise to a conflict.

Section 177: declare an interest in a proposed transaction

Where a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors before the company enters into it. Declaration can be at a board meeting, by written notice, or by general notice. Section 182 imposes a parallel obligation for transactions the company has already entered into, and breach of section 182 is a criminal offence, which section 177 is not.

Sole directors are not exempt from thinking about this. Where a company has only one director there is no board to declare to, but the underlying conflict duties in section 175 still bite, and related-party transactions still need to withstand scrutiny.

What happens when a duty is breached

Section 178 preserves the common law consequences of breach, which vary by duty. Remedies can include damages or compensation, restoration of company property, an account of profits, and rescission of a contract entered into in breach.

The claim belongs to the company, so ordinarily the board decides whether to bring it, which is awkward when the board is the problem. Shareholders can seek permission to bring a derivative claim under Part 11 of the Act. Shareholders can ratify some breaches by ordinary resolution under section 239, with the votes of the director concerned and connected persons disregarded.

Separate consequences sit outside the Companies Act. Wrongful trading under section 214 of the Insolvency Act 1986 makes a director personally liable to contribute to assets where they continued trading past the point at which there was no reasonable prospect of avoiding insolvent liquidation. Fraudulent trading under section 213 is more serious and harder to prove. Under the Company Directors Disqualification Act 1986 a director found unfit can be disqualified for between two and fifteen years, which bars them from acting as a director or being involved in company management.

Practical steps for a board

Keep a standing conflicts register and open every board meeting by inviting declarations. It takes a minute and it evidences compliance.
Minute the reasoning, not just the decision. Section 172 is judged on what directors considered, so minutes that record the factors weighed are the best evidence you will ever have.
Give new directors a proper induction covering the seven duties, the articles, and any shareholders' agreement.
Review directors' and officers' liability insurance, remembering that section 232 prevents a company from exempting a director from liability for breach of duty, though indemnities and insurance are permitted within limits.
Escalate early in financial distress, because the point at which creditors' interests come into play is a legal question best answered with advice rather than optimism.

The duties are the legal floor. Everything above them, the codes, the policies and the culture, is what our guides to corporate governance, the UK Corporate Governance Code and board responsibilities cover, or start from the e-BusinessEthics homepage. The full statutory text is on legislation.gov.uk.

Frequently Asked Questions

What are the seven directors' duties under the Companies Act 2006?

They are set out in sections 171 to 177: to act within powers, to promote the success of the company, to exercise independent judgement, to exercise reasonable care, skill and diligence, to avoid conflicts of interest, not to accept benefits from third parties, and to declare an interest in a proposed transaction with the company.

Who do directors owe their duties to?

The general duties are owed to the company itself, not to individual shareholders, employees or creditors. That is why a claim for breach normally belongs to the company, and why shareholders who want to pursue a director usually need permission to bring a derivative claim under Part 11 of the Act.

What does section 172 actually require?

A director must act in the way they consider, in good faith, would most likely promote the success of the company for the benefit of members as a whole, having regard to long-term consequences, employees, business relationships, community and environmental impact, reputation for high standards, and fairness between members. The test is subjective, but decisions no reasonable director could have thought beneficial invite scrutiny.

Do the duties apply to shadow and de facto directors?

Yes. Section 250 defines a director by function rather than title, and section 251 covers shadow directors, meaning people whose instructions the board is accustomed to follow. The general duties apply to shadow directors where they are capable of applying, so a controlling shareholder directing decisions can carry director-level liability.

What happens if a director breaches their duties?

Remedies preserved by section 178 include damages, restoration of company property, an account of profits and rescission of the relevant contract. Separately, a director can face personal liability for wrongful trading under the Insolvency Act 1986 and disqualification for between two and fifteen years under the Company Directors Disqualification Act 1986.

Do directors' duties change when a company is in financial difficulty?

Yes. As insolvency becomes probable, the duty to promote the company's success is modified so that the interests of creditors must be taken into account, a principle examined by the Supreme Court in BTI 2014 LLC v Sequana SA in 2022. Directors of a struggling company should take professional advice early, because decisions made in this period are the ones most likely to be reviewed later.