Directors Duties Companies Act

The Companies Act 2006 did something unusual when it came into force: it wrote down, in a single chapter, the core duties that company directors had previously owed under a patchwork of common law rules and equitable principles built up by the courts over more than a century. Those duties now sit in Part 10, Chapter 2 of the Act, and they apply to every director of every UK company.

This page is our statute-by-statute reference. It works through sections 170 to 177, then the supplementary provisions on consequences, authorisation and ratification, and finally the duties and protections that sit outside the codified list. If you want a broader overview of everything a non-executive is responsible for, start with our guide to NED responsibilities and legal duties. For a plain-English summary of the legal exposure a NED takes on, including insolvency and regulatory liability, see what are the legal duties of a non-executive director in the UK.

This guide explains the law in general terms. It is not legal advice, and any director facing a specific question about their duties should take advice from a solicitor.

Who the Duties Are Owed To: Section 170

Section 170 sets the frame for everything that follows. It says the general duties in sections 171 to 177 are owed by a director to the company. They are not owed to individual shareholders, to employees, to creditors or to any other stakeholder directly, even though several of those groups feature in the content of the duties.

That has a practical consequence. In the ordinary course, only the company can enforce the duties. Usually that means the board deciding to bring a claim, or a liquidator or administrator doing so after insolvency. Shareholders can sometimes bring a derivative claim on the company’s behalf, but they cannot generally sue a director for breach of the general duties in their own right.

Section 170 also makes three further points that are easy to miss:

• Some duties outlive the directorship. A former director remains bound by the conflict duty in section 175 as regards property, information or opportunities they became aware of while a director, and by the duty in section 176 not to accept benefits from third parties for things done or omitted while they were a director.
• The duties are interpreted in line with the old law. They replace the earlier common law rules and equitable principles, but the courts interpret and apply them in the same way, with regard to those earlier rules. Older case law therefore remains relevant.
• Shadow directors are caught. The general duties apply to a shadow director where and to the extent that they are capable of applying.

The Seven General Duties

1. Duty to Act Within Powers (Section 171)

Section 171 requires a director to act in accordance with the company’s constitution and to exercise powers only for the purposes for which they were conferred. The constitution means, principally, the articles of association, together with resolutions and agreements that affect it.

There are two limbs here. The first is straightforward: follow the articles. The second, the “proper purpose” limb, is more subtle. A director can act within the letter of a power and still breach the duty if they use it for a collateral purpose. The classic example is issuing shares not to raise capital but to dilute a shareholder or defeat a takeover bid.

For non-executives, this duty usually bites when the board approves something unusual: a share issue in a contested situation, a change of control, a related-party arrangement. The NED’s job is to ask what the power is being used for and whether that purpose is the one the articles intended.

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

Section 172 is the most widely discussed of the duties. 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 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 as between members of the company.

Three points matter in practice. First, the test is subjective: it is what the director considers, in good faith, will promote success. Courts do not substitute their own commercial judgement. Second, the listed factors are matters to have regard to, not separate duties owed to those groups. Third, the board needs to be able to show that it considered them. That is why board papers increasingly include a stakeholder section and why larger companies publish a section 172 statement in their strategic report.

Section 172(2) adapts the duty for companies whose purposes are not, or not only, for the benefit of members, such as charitable companies. Section 172(3) makes the duty subject to any rule of law requiring directors to consider or act in the interests of creditors, which is where the creditor duty discussed below comes in. For more on how NEDs apply this duty to shareholders in practice, see how non-executive directors protect shareholder interests.

3. Duty to Exercise Independent Judgement (Section 173)

Section 173 is short: a director must exercise independent judgement. The duty is not infringed where the director acts in accordance with an agreement duly entered into by the company that restricts the future exercise of directors’ discretion, or in a way authorised by the constitution.

This is a legal duty of independent thought, and it applies to every director. It is different from “independence” in the governance sense used by the UK Corporate Governance Code, which is about whether a non-executive has relationships or circumstances that might affect their objectivity. An investor-appointed director is not independent in the Code sense, but they must still exercise independent judgement in the section 173 sense. They can take account of their appointor’s views, but they cannot simply follow instructions. Our guide to the difference between an independent and a non-executive director explains the governance test.

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

Section 174 sets the standard of competence. A director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with:

• the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and
• the general knowledge, skill and experience that the director actually has.

The first limb is an objective minimum: every director must meet the standard expected of someone in their role. The second raises the bar for directors with particular expertise. A non-executive who is a chartered accountant chairing the audit committee will be judged against what someone with that background should have spotted. Being part-time or non-executive does not lower the minimum.

For NEDs this is the duty that drives the practical disciplines of the role: reading the board pack properly, asking questions until the answer is understood, following up actions and making sure concerns are recorded. Our guide to preparing for your first board pack turns the duty into a working routine.

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

Section 175 requires a director to avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. It applies in particular to the exploitation of property, information or opportunities, and it does not matter whether the company could itself have taken advantage of them.

Key points from the statute:

• The duty does not apply to conflicts arising from a transaction or arrangement with the company itself. Those are dealt with by section 177.
• It 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.
• In a private company, the directors can authorise a conflict unless the constitution invalidates that. In a public company, they can do so only if the constitution includes a provision enabling them to.
• Authorisation is effective only if the quorum is met without counting the interested director (or any other interested director), and the matter was agreed without their votes or would have been agreed if their votes had not been counted.

For non-executives with several board seats, advisory roles or investments, this duty needs active management: a register of interests, authorisation of situational conflicts when joining, and stepping back where a conflict arises. Our guide on handling conflicts of interest as a non-executive director covers the practicalities.

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

Section 176 prohibits a director from accepting a benefit from a third party conferred because they are a director, or because of something they do or do not do as a director. A third party means anyone other than the company, an associated body corporate, or someone acting on their behalf.

Two qualifications matter. Benefits from the person through whom a director’s services are provided to the company are not treated as coming from a third party. And the duty is not infringed if accepting the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Ordinary corporate hospitality will often fall into that category, but gifts, fees or inducements from suppliers, bidders or counterparties need care. Many boards adopt a gifts and hospitality policy to put the duty into practice.

7. Duty to Declare an Interest in a Proposed Transaction or Arrangement (Section 177)

Section 177 requires a director who is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company to declare the nature and extent of that interest to the other directors. The declaration must be made before the company enters into the transaction. It can be made at a board meeting or by written or general notice, and it must be updated if it becomes inaccurate or incomplete.

No declaration is needed where the interest cannot reasonably be regarded as likely to give rise to a conflict, where the other directors are already aware of it (or ought reasonably to be), or where it concerns the director’s own service contract being considered by the board or a committee. A director is treated as aware of matters of which they ought reasonably to be aware.

Section 177 covers proposed transactions. Interests in transactions the company has already entered into are dealt with separately under section 182, which carries its own declaration requirement.

Consequences of Breach: Section 178

Section 178 provides that the consequences of breach, or threatened breach, of sections 171 to 177 are the same as would apply under the corresponding common law rule or equitable principle. All the duties except section 174 are enforceable in the same way as any other fiduciary duty owed by directors to the company.

In practical terms, the remedies available to the company can include damages or compensation, an account of profits made from the breach, restoration of company property, setting aside a transaction, and injunctions. Breach of the care and skill duty in section 174 is treated as negligence rather than breach of fiduciary duty, so the remedy is typically damages for the loss caused.

Authorisation, Ratification and Relief

Section 180: how the duties interact with consent

Section 180 deals with how the general duties fit with other rules. Where a conflict has been authorised by the directors under section 175, or an interest has been declared under section 177, the transaction is not liable to be set aside under any common law or equitable rule requiring shareholder approval, although any statutory or constitutional requirement for member approval still applies. Section 180 also confirms that where the articles contain provisions for dealing with conflicts, a director who acts in accordance with them does not breach the general duties.

Section 239: ratification by shareholders

Section 239 allows the company to ratify a director’s negligence, default, breach of duty or breach of trust by a resolution of the members. Crucially, the votes of the director concerned, if they are a shareholder, and of any member connected with them must be disregarded. Some acts cannot be ratified at all, and ratification does not affect a decision taken by unanimous consent of the members.

Section 1157: relief by the court

Section 1157 gives the court power to relieve a director, wholly or in part, from liability for negligence, default, breach of duty or breach of trust if they acted honestly and reasonably and ought fairly to be excused. A director who expects a claim can apply for relief in advance. It is a discretionary safety net, not a defence to rely on, and it is no substitute for proper process.

The Creditor Duty

Section 172(3) preserves any rule of law requiring directors to consider or act in the interests of creditors. In BTI 2014 LLC v Sequana SA, the Supreme Court confirmed that such a duty exists. In broad terms, it requires directors to give weight to creditors’ interests when the company is insolvent or bordering on insolvency, or when an insolvent liquidation or administration is probable. The closer the company is to insolvency, the more weight creditors’ interests carry.

Alongside this sits wrongful trading under section 214 of the Insolvency Act 1986. A director who knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration, and who did not take every step to minimise loss to creditors, can be ordered to contribute to the company’s assets. Our guides on the NED’s role when a company faces insolvency and whether NEDs are personally liable for debts explain how this works in practice.

Other Statutory Duties Directors Should Know

The seven general duties are not the whole picture. Directors are also subject to many specific statutory obligations, including:

• Accounts and reports. Preparing and approving annual accounts, the directors’ report and, where required, the strategic report, and filing them on time.
• Records and filings. Keeping proper accounting records, maintaining statutory registers, keeping minutes of directors’ meetings, and filing confirmation statements and changes with Companies House.
• Transactions with directors. Obtaining shareholder approval where Part 10, Chapter 4 requires it, for example for certain long-term service contracts, substantial property transactions and loans to directors.
• Sector and regulatory duties. Health and safety, data protection, anti-bribery and, in regulated firms, the requirements of the Senior Managers and Certification Regime.

Our guide to what a board meeting is covers minutes and decision-making records, and why NEDs are increasingly targeted by regulators explains the wider enforcement picture.

How the Duties Apply to Non-Executive Directors

The Act makes no distinction between executive and non-executive directors. The duties are the same. What differs is how they are applied, because what a reasonably diligent person in a non-executive role is expected to do is not the same as what a managing director is expected to do. In practice, NEDs discharge their duties by:

• insisting on timely, accurate and sufficient information, and following up when it is missing;
• reading and understanding board papers before the meeting;
• asking challenging questions and testing management’s assumptions;
• declaring and managing conflicts promptly and transparently;
• making sure significant concerns, and the board’s reasoning on major decisions, are minuted;
• taking independent professional advice where needed; and
• keeping their own expertise current through development.

The UK Corporate Governance Code sits on top of the statute for companies that apply it, setting expectations on independence, challenge and board effectiveness. Our guide to how the UK Corporate Governance Code impacts non-executive directors explains that overlay, and what is corporate governance sets out the wider framework.

Protecting Yourself as a Director

Understanding the duties is the first protection. The second is making sure the right cover is in place before you join a board. That means directors’ and officers’ liability insurance, a deed of indemnity within what sections 232 to 234 permit, and clear terms of appointment. Our guide to what insurance non-executive directors need covers D&O and indemnities, and negotiating board role terms explains what to ask before you accept. If due diligence raises serious concerns, read when a NED should walk away from a board appointment.

Frequently Asked Questions

Do non-executive directors have the same legal duties as executive directors?
Yes. The Companies Act 2006 does not distinguish between them. All directors owe the seven general duties in sections 171 to 177. What differs is how the care, skill and diligence standard in section 174 is applied, because it takes account of the functions the director carries out and the knowledge and experience they have.

Who can enforce directors’ duties?
The duties are owed to the company, so the company is the proper claimant. In practice that usually means the board, or a liquidator or administrator after insolvency. Shareholders can sometimes bring a derivative claim on the company’s behalf, but they cannot generally sue for breach of the general duties in their own right.

Can a conflict of interest be authorised?
Yes. Under section 175, the directors of a private company can authorise a conflict unless the constitution prevents it, and the directors of a public company can do so if the constitution permits. The interested director must not count towards the quorum and their vote must not be needed to pass the authorisation.

What is the creditor duty?
It is the duty, preserved by section 172(3) and confirmed by the Supreme Court in Sequana, to give weight to creditors’ interests when a company is insolvent, bordering on insolvency, or when insolvent liquidation or administration is probable. The nearer the company is to insolvency, the more weight creditors’ interests carry.

Can shareholders forgive a breach of duty?
In many cases, yes. Section 239 allows the members to ratify a director’s negligence, default, breach of duty or breach of trust, but the votes of the director concerned and any connected member are disregarded. Some acts cannot be ratified at all.

What is section 1157 relief?
It is the court’s power to relieve a director, wholly or partly, from liability where they acted honestly and reasonably and ought fairly to be excused. It is discretionary and should be seen as a last resort, not a substitute for following proper process.