Directors Duties Companies Act

NED Capital Knowledge Centre  |  Adrian Lawrence FCA, Founder

Every director of a UK company — whether executive or non-executive, whether on a FTSE 100 board or a small private company board — owes the same seven duties to the company under the Companies Act 2006. These duties are codified in Sections 171–177 of the Act, replacing the previous common law duties with a statutory framework that applies uniformly to all company directors regardless of their specific role, the size of their company or the nature of their board appointment. Understanding these duties — and in particular how they apply specifically to non-executive directors — is a fundamental governance literacy requirement for anyone serving on or considering joining a company board.

This guide explains each of the seven directors’ duties, how they apply to non-executive directors specifically and the governance implications of each duty for how NEDs approach their board responsibilities.

Why Directors’ Duties Apply Equally to NEDs and Executives

One of the most consequential misunderstandings about non-executive director roles is the assumption that the part-time, non-executive nature of the appointment limits the legal duties and personal liability that apply. It does not. The Companies Act 2006 imposes identical legal duties on executive and non-executive directors — the NED who fails to exercise independent judgement, who ignores a conflict of interest or who fails to apply reasonable care and skill in exercising their board responsibilities is potentially personally liable for breach of duty in exactly the same way as an executive director.

The practical implications of this legal equality are significant. NEDs cannot defend themselves against breach of duty claims by pointing to their non-executive status, their limited time commitment or their lack of access to management information. What a NED is expected to know, to challenge and to have done — under each of the seven duties — is calibrated to the standard of a reasonably diligent person with both the general knowledge of a competent director and the specific knowledge and experience that the particular NED brings. The more experienced and capable the NED, the higher the standard they are held to.

The Seven Directors’ Duties — Section by Section

1. Duty to Act Within Powers (Section 171)

A director must act in accordance with the company’s constitution — its articles of association and any shareholder resolutions — and must exercise powers only for the purposes for which they were conferred. This means a director cannot use their governance authority for purposes that the constitution does not authorise or that serve the director’s personal interests rather than the company’s.

Implications for NEDs. The Section 171 duty is most directly relevant to NEDs in the context of related party transactions and in situations where a NED might be tempted to use their board position to advance their personal interests or those of a connected party. A NED who votes in favour of a transaction that is outside the company’s authorised purposes, or who uses their position on the board to direct the company into activities that benefit a connected person rather than the company, is in breach of Section 171.

2. Duty to Promote the Success of the Company (Section 172)

A director must act in good faith in the way they consider most likely to promote the success of the company for the benefit of its members as a whole. In doing so, the director must have regard to a non-exhaustive list of factors: the likely long-term consequences of decisions; the interests of the company’s employees; the need to foster business relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly between the members of the company.

Implications for NEDs. Section 172 is the most far-reaching of the directors’ duties in its scope. It requires NEDs to engage with decisions not just in terms of their immediate financial implications but in terms of their long-term consequences, their impact on employees and other stakeholders and their environmental and community effects. This duty is the statutory foundation for the ESG governance responsibilities that governance codes and institutional investors are increasingly articulating — the legal obligation to consider stakeholder interests is embedded in Section 172, predating and underpinning the ESG agenda by nearly two decades.

For NEDs specifically, Section 172 is the duty that most directly governs strategic challenge. A NED who approves a board decision without considering its long-term consequences, its effect on employees or its environmental impact has not fulfilled their Section 172 duty — even if the decision is financially sound in the short term.

3. Duty to Exercise Independent Judgement (Section 173)

A director must exercise independent judgement. They must form their own view on board decisions rather than simply deferring to others — whether to the CEO, to the chair, to a major shareholder or to any other party whose influence might compromise the independence of the director’s own assessment.

Implications for NEDs. Section 173 is the legal foundation for the governance expectation that NEDs exercise genuine independence. A NED who consistently votes with the chair or management without forming an independent view on each decision, who defers to a controlling shareholder’s preferred position on governance matters or who fails to challenge management on decisions that warrant challenge is in breach of the duty to exercise independent judgement — regardless of whether those decisions turn out to be correct.

This duty has specific implications for NEDs who are appointed by significant shareholders — investor-representative NEDs who are expected to support the shareholder’s position on the board are in potential tension with Section 173. The practical resolution is that a NED who is appointed as a shareholder representative should not be described as independent; their Section 173 duty still applies but their governance role is acknowledged to be different from an independent NED’s.

4. Duty to Exercise Reasonable Care, Skill and Diligence (Section 174)

A director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with both: the general knowledge, skill and experience reasonably expected of a person carrying out the functions the director carries out; and the actual knowledge, skill and experience the director has.

This dual standard is important. The first limb sets a minimum baseline — the standard of a competent director carrying out that specific role. The second limb raises the standard for directors with specific expertise — a qualified accountant serving on an audit committee is held to the standard of a competent accountant, not merely a competent director. A doctor serving on the board of a healthcare company is held to a higher standard of care and skill regarding clinical governance than a director without medical training.

Implications for NEDs. Section 174 directly determines what a NED is expected to know, to have challenged and to have done before a board decision is made. NEDs who claim they did not have enough information to challenge a particular decision need to have asked for the information before the decision was made — a NED who proceeds to vote on a decision without the information they need to assess it has not discharged their Section 174 duty. For NEDs with specific expertise, the section creates a higher standard in their areas of competence — a finance-qualified NED who failed to identify a material accounting error that their expertise should have flagged is potentially in breach of Section 174.

5. Duty to Avoid Conflicts of Interest (Section 175)

A director must avoid situations in which they have, or can have, a direct or indirect interest that conflicts with, or may conflict with, the interests of the company. This duty applies to the exploitation of property, information or opportunity — a director cannot personally benefit from an opportunity that belongs to the company, even if they become aware of it through their role as a director.

The duty does not apply where the conflict arises in relation to a transaction or arrangement with the company (which is covered by Section 177) or where the situation has been authorised by the other directors. In private companies, the articles can authorise conflicts — many private company articles include a general conflict authorisation that allows directors to have interests in transactions with the company.

Implications for NEDs. Section 175 is particularly relevant for NEDs who hold multiple board positions, who operate consulting businesses alongside their NED roles or who have personal business interests that might overlap with the company’s activities. A NED who serves on the boards of two companies in the same market — and who uses information obtained in one board capacity to benefit the other company — is in clear breach of Section 175. NEDs should maintain and regularly update a register of interests, disclose potential conflicts proactively and recuse themselves from board discussions where their personal interests might compromise their objectivity.

6. Duty Not to Accept Benefits from Third Parties (Section 176)

A director must not accept a benefit from a third party conferred by reason of being a director or doing or not doing anything in their capacity as a director. The key phrase is “by reason of being a director” — gifts, hospitality or financial benefits that are provided to a director specifically because of their directorial role, rather than for legitimate business reasons, are prohibited.

Implications for NEDs. Section 176 is the anti-bribery dimension of directors’ duties. A NED who accepts personal financial benefits from a business partner of the company, in circumstances where those benefits are connected to the NED’s ability to influence the board’s decisions toward that partner’s interests, is in breach of Section 176 — and potentially also in breach of the Bribery Act 2010. In practice, most companies address Section 176 through gifts and hospitality policies that define what directors can accept and require disclosure of anything accepted beyond a defined threshold.

7. Duty to Declare Interests in Proposed Transactions (Section 177)

A director must declare to the other directors the nature and extent of any direct or indirect interest in a proposed transaction or arrangement before the company enters into the transaction. The declaration must be made at the board meeting where the transaction is first proposed, or if the director becomes aware of the conflict after that point, at the next board meeting or by notice to the other directors.

Implications for NEDs. Section 177 is the most operationally routine of the directors’ duties — it governs the common governance situation where a board is considering a transaction in which one or more directors have a personal interest. A NED who is a shareholder in a company that the board is considering as a supplier, who has a family member employed by a potential acquisition target or who has a personal financial interest in a proposed property transaction must declare this interest before the board discusses and decides on the transaction. The declaration should be specific — “I have an interest in this transaction” is insufficient; the nature and extent of the interest must be described.

Breach of Duty — Personal Liability

Where a director breaches one or more of the seven duties, the company can bring a claim against the director for compensation. The remedy for breach varies by duty — breach of the duty to promote the company’s success (Section 172) may require the director to account for any personal benefit obtained; breach of duty to avoid conflicts (Section 175) may require disgorgement of profits the director made from the conflicted opportunity; breach of the duty to exercise reasonable care and skill (Section 174) may require the director to compensate the company for losses caused by the breach.

Directors’ liability insurance (D&O insurance) provides some protection against breach of duty claims — but it does not protect directors against claims arising from deliberate wrongdoing, fraud or wilful breach of duty. NEDs who believe they are adequately protected by D&O insurance from the consequences of failing to exercise their duties should be aware that the insurance has limits and exclusions that may not cover all breach of duty scenarios.

Directors’ Duties When the Company Is in Financial Difficulty

When a company is insolvent or approaching insolvency, the directors’ duties change in a specific and important way. Section 172’s primary obligation — to promote the success of the company for the benefit of its members — shifts to include a duty to consider the interests of creditors as the company’s financial position deteriorates. In an insolvent company, the interests of creditors become paramount and directors who continue to make decisions that benefit shareholders at the expense of creditors (including by continuing to trade when the company cannot pay its debts) may be personally liable for wrongful trading under the Insolvency Act 1986.

This shift in duty is one of the most practically important governance situations a NED will face, and one of the most difficult to navigate without specialist advice. A NED who is on the board of a company approaching insolvency should seek independent legal advice about the specific governance obligations that apply in the company’s specific financial circumstances — not rely on the advice of management, who have their own interests in the outcome.

Related guides: What Is a Non-Executive Director?  |  Executive vs Non-Executive Director  |  What Is Corporate Governance?  |  Board Structure & Independence  |  NED Knowledge Centre

NED Capital places non-executive directors for companies across the UK. For guidance on NED appointments and board governance, call 0203 137 2496 or see our NED Recruitment Agency page.