Directors' Duties Under the Companies Act 2006: What You Must Know
The seven directors' duties under the Companies Act 2006, explained in plain English. Covers breach consequences, insolvency risks and practical governance tips
Every person appointed as a director of a UK company automatically becomes subject to a set of legal duties owed to that company. Those duties are not found in a contract or a shareholders' agreement: they are statute. Sections 171 to 177 of the Companies Act 2006 codify seven general duties that replace the old common law and equitable rules which previously governed director conduct.
The duties apply from the moment of appointment and, in two respects, survive resignation. They are owed to the company itself, not to individual shareholders, creditors or employees, though those groups may benefit indirectly. Importantly, the duties also apply to people who act as directors without formal appointment (de facto directors) and, where applicable, to people who give instructions that the board habitually follows (shadow directors), following the amendment to section 170 made by the Small Business, Enterprise and Employment Act 2015.
This article explains who falls within scope, what each duty requires, the consequences of getting it wrong, and the additional considerations that arise when a company enters financial difficulty. It is general information only and does not constitute legal advice. If you face a specific situation, seek advice from a qualified solicitor.
Who Counts as a Director?
A director for these purposes is not limited to someone named in the register at Companies House. The Companies Act 2006 distinguishes three categories.
A de jure director is formally appointed and registered. A de facto director acts in the role of director, taking part in board decisions and representing the company externally, without ever having been formally appointed. A shadow director is a person whose instructions the board is accustomed to follow, even though that person is not themselves on the board. Nominee directors, parent company representatives and dominant founders who step back from formal office but continue to call the shots can all fall into one of these categories.
Why does this matter? Because the courts have consistently held that anyone who genuinely occupies or exercises a director's function will be treated as such, and the duties will follow. The government's own guidance on being a company director (published on GOV.UK) confirms that the duties apply if you 'act as a director but have not been formally appointed' or if you 'control a board of directors without being on it'.
The Seven General Duties at a Glance
The table below sets out each of the seven duties, the section of the Companies Act 2006 that creates it, and what it means in day-to-day practice. The sections came into force on 1 October 2007.
| Section | Duty | What it means in practice |
|---|---|---|
| s171 | Act within powers | Follow the company's articles of association and exercise each power only for the purpose for which it was granted. Do not use a power granted for one purpose to achieve a different objective. |
| s172 | Promote the success of the company | Act in good faith in the way you consider most likely to promote the company's success for the benefit of its members as a whole, having regard to the six factors listed in s172(1)(a)-(f). |
| s173 | Exercise independent judgement | Form your own view on each decision. You may take advice and follow delegated authority, but you cannot simply rubber-stamp the wishes of a dominant shareholder or third party. |
| s174 | Exercise reasonable care, skill and diligence | Apply the care and skill of a reasonably diligent person with the general knowledge and experience reasonably expected of someone in your role, or your own higher personal expertise if relevant. |
| s175 | Avoid conflicts of interest | Avoid situations where you have, or could have, a direct or indirect interest that conflicts or might conflict with the company's interests. The duty extends to property, information and opportunity. |
| s176 | Not to accept benefits from third parties | Do not accept any benefit conferred by a third party by reason of being a director or of doing anything as a director, unless acceptance cannot reasonably give rise to a conflict. |
| s177 | Declare interest in proposed transactions | Before the company enters into a transaction or arrangement in which you have a direct or indirect interest, declare the nature and extent of that interest to the other directors. |
Section 172 in Depth: Promoting Success
Section 172 is the most commercially significant of the seven duties and the one most often cited in disputes. It requires a director to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
Critically, 'success' is not just short-term profit. Section 172(1) lists six factors the director must have regard to when making decisions:
The six factors are: (a) the likely consequences of any decision in the long term; (b) the interests of the company's employees; (c) the need to foster the company's business relationships with suppliers, customers and others; (d) the impact of the company's operations on the community and the environment; (e) the desirability of the company maintaining a reputation for high standards of business conduct; and (f) the need to act fairly as between members of the company.
Having regard to these factors does not mean each one overrides profitability or member interests. It means the director must genuinely consider them when deliberating. Board minutes should reflect that consideration. For larger companies (over 250 employees), a section 172(1) statement must appear in the strategic report, describing how directors have had regard to these matters.
Consequences of Breach
Section 178 of the Companies Act 2006 sets out the civil consequences of breach. The duties (other than section 174) are enforceable as fiduciary duties, giving the company the full range of equitable remedies. The key consequences are listed below.
Section 174 (reasonable care, skill and diligence) is the exception: it sounds in negligence, so the remedy is compensatory damages. The court also has a discretionary power under section 1157 to relieve a director who acted honestly and reasonably and ought fairly to be excused, but reliance on that provision in litigation is costly and uncertain.
Disqualification is a separate and significant risk. Under the Company Directors Disqualification Act 1986, a court can disqualify a director for between 2 and 15 years. In 2024-25, 1,036 directors were disqualified across England, Scotland and Wales, with the average ban lasting 8.3 years.
Directors in the Zone of Insolvency: The Creditor Duty
The seven general duties are owed to the company for the benefit of its members. But that picture changes when a company approaches insolvency.
In BTI 2014 LLC v Sequana SA [2022] UKSC 25, the UK Supreme Court confirmed the existence of a creditor duty, holding that when directors know or ought to know that their company is insolvent, or that insolvency is probable, the section 172 duty to promote the success of the company for the benefit of its members shifts to require directors to have regard to the interests of creditors as a whole. The greater the financial difficulty, the more weight creditors' interests must receive. Where administration or liquidation becomes inevitable, creditors' interests become paramount.
In practical terms, this means a director who causes the company to pay dividends, repay connected-party loans or enter into transactions at a time when the company is insolvent or on the verge of insolvency risks personal liability for wrongful trading under section 214 of the Insolvency Act 1986 as well as breach of the creditor duty.
The Sequana case also confirmed that the duty does not arise simply because there is a risk, however remote, of future insolvency. On the facts, AWA was solvent at the time of the dividend in question, so the duty was not engaged. The trigger is knowledge, or constructive knowledge, that insolvency is probable, not merely possible.
Directors should treat early warning signs (cash-flow pressure, threats of winding-up petitions, large contingent liabilities) as a prompt to seek immediate legal and insolvency advice.
Practical Governance: How to Stay on the Right Side of the Law
The duties reward good governance habits rather than demanding heroic conduct. The steps below reduce risk and help directors demonstrate compliance if a decision is later challenged.
On conflicts of interest, note that under section 182 there is a separate obligation (carrying criminal sanctions) to declare interests in existing transactions, not just proposed ones. Where a section 175 conflict is authorised by the board, the interested director should absent themselves from the vote and the process should be minuted carefully.
Conclusion
The seven general duties under the Companies Act 2006 form the legal backbone of how UK company directors must conduct themselves. They are not aspirational standards: they carry real legal consequences, including personal liability, disgorgement of profits and disqualification. For founders and early-stage directors in particular, the combination of section 172 (promoting success while considering a wide range of stakeholder interests) and the shifting creditor duty as financial pressure increases means that governance cannot be an afterthought.
Good habits, properly documented, are the most reliable protection. Declare interests, record decisions with reasoning, stay within your constitutional powers, monitor the company's financial health, and take qualified advice when the position is unclear. This article is a starting point, not a substitute for legal advice tailored to your specific circumstances.
Frequently asked questions
Do the seven duties apply to non-executive directors as well as executive directors?
Yes. The Companies Act 2006 makes no distinction between executive and non-executive directors. All directors owe all seven duties, though the standard under section 174 (reasonable care, skill and diligence) will be calibrated to the knowledge, skill and experience reasonably expected of a person carrying out that particular role.
Can a director be personally sued if the company fails?
Yes, in certain circumstances. The limited liability of the company protects shareholders' personal assets from the company's debts, but it does not shield directors from personal liability for their own breaches of duty. A director who causes the company loss by breaching one of the seven duties can be required to compensate the company from their own funds.
What is a shadow director and do they owe the same duties?
A shadow director is a person whose instructions the board is accustomed to follow, without that person being formally appointed to the board. Following the amendment to section 170 of the Companies Act 2006 made by the Small Business, Enterprise and Employment Act 2015, the general duties apply to shadow directors where and to the extent that they are capable of doing so.
If shareholders approve a transaction, can a director still be in breach of duty?
Shareholder ratification can cure certain breaches, but not all. Ratification requires an ordinary resolution of the members, and certain breaches involving fraud on a minority cannot be ratified by a simple majority. The safest approach is to declare interests, obtain any necessary board or shareholder approval in advance, and document the process.
When does the duty to consider creditors kick in?
Following BTI 2014 LLC v Sequana SA [2022] UKSC 25, the creditor duty becomes engaged when directors know or ought to know that the company is insolvent or that insolvency is probable. It does not arise merely because insolvency is possible at some uncertain future date. The more serious the financial position, the more weight must be given to creditors' interests.
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