TRW & Co · Company law and governance
Directors' Duties under the Companies Act 2006: A Practical Guide
On directors duties UK law is set out in sections 171 to 177 of the Companies Act 2006: seven general duties owed to the company, from promoting its success to avoiding conflicts. They apply to every director, executive or not. As insolvency approaches, directors must give growing weight to creditors, and breach can bring personal liability and disqualification.
Key pointSince the Supreme Court's Sequana decision, the creditor duty is engaged when directors know or ought to know the company is insolvent or bordering on insolvency, or that insolvent liquidation or administration is probable; contemporaneous board minutes are the best evidence that it was respected.
At a glance
Seven codified duties
Sections 171 to 177 of the Companies Act 2006 set out the general duties, interpreted in light of the earlier common law and equitable principles.
Owed to the company
Duties are owed to the company, so claims are brought by the company, a liquidator or administrator, or shareholders through a derivative claim with court permission.
Section 172 statement
Companies preparing a strategic report must explain how directors had regard to the section 172(1) factors, unless they qualify as medium-sized.
Creditor duty near insolvency
Sequana confirmed directors must consider creditors' interests once insolvency is actual, imminent or probable, with increasing weight as the position worsens.
Protection is limited
Ratification, court relief for honest and reasonable conduct, D&O insurance and qualifying indemnities help, but blanket exemptions from liability to the company are generally void.
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Directors duties UK: the short answer
In the law on directors duties UK practitioners mean the seven general duties in sections 171 to 177 of the Companies Act 2006. A director must act within the company's powers, promote its success, exercise independent judgment, use reasonable care, skill and diligence, avoid conflicts of interest, refuse benefits from third parties and declare interests in proposed transactions.
The duties are owed to the company, not to individual shareholders, and the company enforces them. As a company approaches insolvency, the focus shifts: directors must give increasing weight to creditors' interests. Breach can lead to personal liability to compensate the company, to account for profits, and, in insolvency, to wrongful trading claims and disqualification.
The duties apply to every director: executive and non-executive, de facto directors and, so far as the statute provides, shadow directors. The private nature of a company, or the fact that a director is unpaid, does not lower the standard.
The seven statutory duties explained
The general duties are codified in Part 10, Chapter 2 of the Companies Act 2006. They replaced earlier common law and equitable rules, but section 170 directs courts to interpret them by reference to those rules, so older case law still matters.
| Section | Duty | What it requires in practice |
|---|---|---|
| s171 | Act within powers | Follow the articles and shareholder resolutions; use powers only for the purposes for which they were given. |
| s172 | Promote the success of the company | Act in good faith for the benefit of members as a whole, having regard to long-term consequences, employees, suppliers and customers, community and environment, reputation and fairness between members. |
| s173 | Exercise independent judgment | Decide for yourself; you may take advice and act under properly approved agreements, but must not simply follow a nominator's instructions. |
| s174 | Reasonable care, skill and diligence | Meet the standard of a reasonably diligent person with the knowledge and experience expected of someone in your role, and your own actual knowledge and experience if higher. |
| s175 | Avoid conflicts of interest | Avoid situations where your interests conflict, or may conflict, with the company's, including exploiting opportunities and information, unless authorised. |
| s176 | Not accept benefits from third parties | Do not accept benefits given because you are a director, unless they cannot reasonably be regarded as likely to give rise to a conflict. |
| s177 | Declare interest in proposed transactions | Declare the nature and extent of any direct or indirect interest in a proposed transaction with the company before it is entered into. |
The care and skill standard
Section 174 sets a dual test. Every director must meet an objective minimum standard for someone in their position, and a director with special expertise, such as a qualified accountant acting as finance director, is judged against that higher level. Non-executive directors are not excused because they are part-time: they must understand the business, read board papers and challenge management.
Who the duties apply to
Directors duties UK legislation imposes apply to anyone who acts as a director, whatever their title. A de facto director, who is not formally appointed but assumes the role, is treated in the same way. Shadow directors, whose instructions the board is accustomed to follow, are subject to the general duties where and to the extent that they are capable of applying. Parent companies and investors who direct a subsidiary's board too closely can find themselves in this position.
Former directors are not entirely released either. The conflict duty and the duty not to accept third-party benefits continue to apply after a director leaves, in relation to matters arising during their time in office.
Section 172 and the section 172 statement
Section 172 is the duty most often cited in boardrooms. It is a subjective test: the question is whether the director honestly believed the decision was most likely to promote the company's success for the members as a whole. A court will not substitute its own business judgment, but it will look closely at whether the listed factors were genuinely considered.
Larger companies must also report on it. Under section 414CZA, a company that prepares a strategic report must include a "section 172(1) statement" describing how the directors have had regard to the factors in section 172(1)(a) to (f). Companies that qualify as medium-sized for the year are exempt. See our guide to the UK Corporate Governance Code for listed company reporting.
Board minutes are your best evidence. For significant decisions, record the options considered, the advice received and how the section 172 factors were weighed. A brief, specific minute written at the time is far more persuasive than a long statement assembled after a dispute has begun.
Conflicts, interests and third-party benefits
Conflicts generate more litigation over directors duties UK courts hear than almost any other area. Section 175 is strict: a director can breach it without dishonesty and even where the company could not have taken the opportunity itself.
The duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict, or if it has been authorised. In a private company, the board can authorise a conflict unless the constitution prevents it; in a public company, the articles must expressly allow it. The interested director cannot count towards the quorum or vote on the authorisation.
Section 177 deals with interests in proposed transactions with the company, such as a contract between the company and another business the director owns. The director must declare the nature and extent of the interest to the other directors before the company enters into the transaction. Existing transactions are covered separately by section 182, where failure to declare is a criminal offence. Certain transactions, such as substantial property transactions and loans to directors, also need shareholder approval.
Nominee and investor directors
Directors appointed by an investor or parent company face particular pressure. They may consider the appointor's interests and share information where the shareholder agreement and articles allow, but they must still exercise independent judgment and act for the company. Clear conflict and information-sharing provisions in the shareholder agreement and articles reduce the risk.
How duties shift as insolvency approaches
Section 172(3) preserves rules requiring directors, in certain circumstances, to consider or act in the interests of creditors. In BTI 2014 LLC v Sequana SA [2022] UKSC 25, the Supreme Court confirmed that this creditor duty exists and explained when it applies.
In broad terms, the duty is engaged when directors know or ought to know that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. It is not triggered merely by a real risk of insolvency. Once engaged, creditors' interests must be considered and given appropriate weight, and the more desperate the company's position, the more weight they carry. Where insolvent liquidation or administration is inevitable, creditors' interests become paramount.
The duty sits alongside the statutory insolvency provisions in the Insolvency Act 1986:
- Wrongful trading under section 214, where a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration and did not take every step to minimise loss to creditors. See our guide to wrongful trading.
- Fraudulent trading under section 213, where business was carried on with intent to defraud creditors.
- Misfeasance under section 212, a summary procedure for liquidators to recover for breach of duty.
Directors facing financial difficulty should take early advice. Our insolvency advice for directors team helps boards document decisions and assess restructuring options.
Practical steps to discharge your duties
Good process is the most reliable way to meet directors duties UK courts will later scrutinise. The steps below suit most private company boards.
- Know the constitution. Read the articles, shareholder agreement, delegated authorities and any reserved matters, and keep them current.
- Prepare for every meeting. Read papers in advance, ask questions and request further information where a decision is significant or unclear.
- Declare interests early. Maintain a register of interests and declare new ones at the start of the relevant meeting, before the transaction is entered into.
- Take advice where needed. Use lawyers, accountants and other experts on complex issues, but reach your own conclusion.
- Record the reasoning. Minutes should show the options, the factors weighed and why the board chose its course.
- Monitor solvency. Review cash flow and balance sheet regularly; if insolvency is in prospect, shift the focus to creditors and take specialist advice.
- Check your protection. Confirm the scope of D&O insurance and any permitted indemnity, and keep your Companies House identity verification and filings in order.
Enforcement, remedies and protection
Because the duties are owed to the company, the company is the proper claimant. In practice, claims are often brought by a new board after a change of control, by a liquidator or administrator, or by shareholders through a derivative claim with the court's permission. A minority shareholder may also complain of conduct as part of an unfair prejudice petition.
Remedies include equitable compensation for loss, an account of profits made from a conflict, rescission of transactions and injunctions. Breach can also support a disqualification order under the Company Directors Disqualification Act 1986, where a director of an insolvent or dissolved company is found unfit.
Most claims for breach of directors duties UK businesses face arise after the event: a sale, a falling-out or an insolvency. Limitation periods, the strength of the documentary record and the availability of insurance often decide whether a claim is pursued.
Directors have several protections. Shareholders can ratify certain breaches by resolution, with the votes of the director and connected persons disregarded. The court may relieve a director who acted honestly and reasonably and ought fairly to be excused under section 1157. Companies may buy D&O insurance and give qualifying third-party indemnities, but a provision exempting a director from liability for breach of duty to the company is generally void.
Illustrative scenario: a related-party contract
This scenario is illustrative only and uses generic parties.
A director of a manufacturing company also owns a logistics business. Management proposes a three-year haulage contract with that business. The director declares her interest at the start of the board meeting and the minutes record it. She leaves the room, and the remaining directors compare competing quotes, consider service levels and record why they believe the contract promotes the company's success.
A year later, the company's cash position deteriorates. The board receives management accounts showing it is likely to breach its lending covenants. The directors take advice, minute that creditors' interests now carry increased weight, and pause discretionary payments, including a proposed dividend. Their record shows each step taken in light of their directors duties UK law imposes, which puts them in a far stronger position if a liquidator later reviews their conduct.
Common mistakes and risks
Treating the company as the majority shareholder's business
In owner-managed companies, directors often act on the instructions of the controlling shareholder without independent consideration. The duties are owed to the company as a whole, and section 173 requires independent judgment. Following instructions to move assets to a related company, pay a dividend the accounts do not support or favour one shareholder group can expose directors to claims from a later board, a liquidator or minority shareholders. Where a controlling shareholder wants a course of action, ensure it is properly considered and documented.
Paying dividends without distributable profits
Dividends can only be paid out of distributable profits shown by relevant accounts. Directors who recommend or pay unlawful dividends may be liable to repay them, and shareholders who knew or had reasonable grounds to believe the payment was unlawful may have to return them. The risk peaks when a company is in difficulty and owners are keen to extract value. Prepare interim accounts where needed and consider the creditor duty before declaring any payment out.
Leaving a company to take a business opportunity
Resigning does not end every obligation. A director who resigns to exploit a maturing business opportunity or information obtained while a director may still breach section 175, which continues to apply after departure in relation to property, information or opportunities of which the director became aware while in office. Directors planning to set up a competing business should take advice before resigning and avoid soliciting customers or using confidential information. Employment contracts may add further restrictions.
Ignoring the creditor duty until it is too late
Boards sometimes keep trading in the hope of a rescue without reassessing their position. Once directors know or ought to know that the company is insolvent or bordering on insolvency, creditors' interests must be properly weighed. Continuing to take on credit without a realistic plan, preferring connected creditors or paying directors' own loans first can lead to personal liability for wrongful trading, preference claims and disqualification. Regular solvency reviews and early professional advice are the best protection.
Cross-border boards and next steps
The directors duties UK company law imposes apply wherever a director lives. Directors based in Bangladesh, the Gulf or Singapore who sit on UK subsidiary boards must exercise independent judgment for the UK company, not simply implement group instructions. Group policies should allow for local board consideration, particularly on intra-group transactions, guarantees and dividends. Corporate liability is widening too: the failure to prevent fraud offence for large organisations is now in force, raising the stakes for governance and compliance.
For a director, the checklist is short: know your constitution, declare conflicts, minute your reasoning, watch solvency closely and check your insurance. TRW & Co's London office, authorised and regulated by the Solicitors Regulation Authority, advises directors and boards on directors duties UK law, conflicts, board process and duties in distressed situations. See our corporate governance page, or contact us at info@trw.co.
Frequently asked questions
01What are the seven duties of a director in the UK?
Under sections 171 to 177 of the Companies Act 2006, a director must act within the company's powers; promote the success of the company for the benefit of its members as a whole; exercise independent judgment; exercise reasonable care, skill and diligence; avoid conflicts of interest; not accept benefits from third parties because of being a director; and declare any interest in a proposed transaction or arrangement with the company. The duties are owed to the company and apply to every director, whether paid or not.
02Can a director be personally liable for a company's debts?
Not ordinarily, because the company is a separate legal person. But a director can become personally liable by giving a personal guarantee, by breaching duties to the company, or through insolvency claims such as wrongful trading, fraudulent trading or misfeasance brought by a liquidator or administrator. Directors may also be liable for certain unpaid taxes in limited circumstances and for receiving unlawful dividends. Disqualification under the Company Directors Disqualification Act 1986 can follow unfit conduct.
03Do non-executive directors have the same duties?
Yes. The Companies Act 2006 draws no distinction between executive and non-executive directors for the general duties. The care, skill and diligence standard in section 174 takes account of the functions a director carries out, so expectations reflect the role, but a non-executive must still understand the business, read papers, ask questions and challenge management. Being part-time or unpaid is not a defence to a failure to engage properly with the board's work.
04When do directors have to consider creditors' interests?
Following the Supreme Court's decision in BTI 2014 LLC v Sequana SA, the creditor duty is engaged when directors know or ought to know that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. A mere real risk of insolvency is not enough. Once engaged, creditors' interests must be considered and given weight that increases as the company's financial position worsens, becoming paramount where insolvent liquidation or administration is inevitable.
05What is a section 172 statement?
It is a statement in a company's strategic report describing how the directors have had regard to the matters listed in section 172(1) of the Companies Act 2006, such as long-term consequences, employees, business relationships, community and environment, reputation and fairness between members. It is required by section 414CZA for companies that prepare a strategic report and do not qualify as medium-sized. It should be specific to the year's principal decisions rather than boilerplate.
06How can a director protect themselves from claims?
Keep well-reasoned board minutes, declare interests promptly, take professional advice on complex decisions and monitor solvency closely. Check that the company holds adequate D&O insurance and whether you have a qualifying indemnity. Shareholders can sometimes ratify a breach, and a court may relieve a director who acted honestly and reasonably under section 1157. Early specialist advice is especially important if the company is in financial difficulty or facing a shareholder dispute.
Sources and official materials
- Companies Act 2006, Part 10 Chapter 2 — The general duties of directors, sections 170 to 181
- Companies Act 2006, section 414CZA — Section 172(1) statement requirement
- BTI 2014 LLC v Sequana SA — Supreme Court judgment on the creditor duty
- Insolvency Act 1986, section 214 — Wrongful trading
- Company Directors Disqualification Act 1986 — Grounds and process for disqualification
- Companies Act 2006, section 1157 — Court's power to grant relief
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.