What are directors’ duties and why do they matter?

The Companies Act 2006 introduced the most comprehensive legal framework for directors’ duties in UK company law. While many of these duties previously existed under common law and legal principles, the Act brought them together into a clear set of rules.

These rules apply to all company directors, including people who act as directors without being officially appointed (de facto directors) and those who influence directors behind the scenes (shadow directors). These duties are designed to promote responsible corporate governance, protect shareholders, and ensure directors act with integrity and accountability.

What duties do company directors have?

Duty to act within powers (s.171)

Directors must act in accordance with the company’s constitution and only exercise their powers for the purposes for which they were conferred. This prevents directors from misusing their authority, for example, issuing shares to manipulate voting power rather than for genuine fundraising.

Duty to promote the success of the company (s.172)

Often described as the core duty, s.172 requires directors to act in a way they consider to be in good faith and which would promote the success of the company for the benefit of its members as a whole.

In doing so, directors must consider a range of factors, including the long‑term consequences of decisions, interests of employees, relationships with suppliers, customers and stakeholders, and the impact on the community and environment. They must also consider maintaining high standards of business conduct and fairness between shareholders.

This section is the statutory embodiment of the “enlightened shareholder value” principle.

Duty to exercise independent judgment (s.173)

Directors must make decisions independently, without undue influence from others.

This does not prevent reliance on expert advice or acting under a shareholders’ agreement, but directors must not simply follow instructions from dominant shareholders or fellow directors.

Duty to exercise reasonable care, skill and diligence (s.174)

This duty combines both objective and subjective standards:

• Objective: The care, skill, and diligence expected of a reasonably diligent person with general knowledge and skill of a director.
• Subjective: The actual knowledge, skill, and experience of the particular director.

This means specialist directors (e.g., accountants, lawyers, engineers) are held to a higher standard in their area of expertise.

Duty to avoid conflicts of interest (s.175)

Directors must avoid situations where their personal interests conflict, or may conflict, with the interests of the company. This includes corporate opportunities, competing businesses and allowing personal relationships to influence decisions.

Some conflicts can be authorised by the board (for private companies, unless restricted by the articles).

Duty not to accept benefits from third parties (s.176)

Directors must not accept benefits (such as gifts, hospitality, or inducements) from third parties that could create a conflict of interest. This duty is strict and applies even if the company suffers no loss.

Duty to declare interests in proposed transactions (s.177)

Directors must declare any direct or indirect interest in a proposed transaction or arrangement with the company. This ensures transparency and allows the board to manage potential conflicts appropriately.

How are directors’ duties enforced?

By the company

The company itself is the primary enforcer. If the company suffers loss due to breach, it may bring a claim against the director.

Derivative actions (ss.260–264)

Shareholders may bring a derivative claim on behalf of the company for breaches of duty, subject to court approval.

Disqualification

Serious breaches may result in disqualification under the Company Directors Disqualification Act 1986.

Remedies

Remedies for breaching directors’ duties include damages or compensation, restoration of company property, rescission of contracts and account of profits.

Why do directors’ duties matter?

Directors’ duties are a fundamental part of UK corporate governance because they help ensure that companies are run responsibly and ethically. These duties promote accountability and transparency, protect the interests of shareholders and other stakeholders, encourage directors to make decisions that support the long-term success of the company, provide clear legal guidance on directors’ responsibilities, and help maintain investor confidence in UK businesses.

In an era of increasing scrutiny of corporate behaviour, complying with directors’ duties is not only a legal requirement but also an essential element of effective and ethical leadership.

What happens when directors’ powers are exercised unfairly? A case study

Willans acted for a minority shareholder and director in a successful business where relations between the shareholders had broken down. The client alleged that the majority shareholder was conducting the company’s affairs in a manner that unfairly prejudiced their interests, including restricting their involvement in management, suspending regular dividend payments and limiting access to financial information.

We brought an unfair prejudice petition under sections 994-996 of the Companies Act 2006, arguing that the client’s legitimate expectations as a shareholder had been undermined. While progressing the claim, we remained focused on achieving a commercial resolution.

Shortly before trial, the dispute settled. Our client’s 35% shareholding was acquired for £1.591 million, the parties achieved a complete separation of their business relationship, and all related claims were resolved.

In owner-managed companies, disputes concerning the exercise of directors’ powers, company governance, shareholder participation and financial transparency can lead to unfair prejudice claims. Taking early legal advice can help shareholders protect their interests and achieve a practical commercial outcome.

If you suspect a director of your company has acted in breach of their duties or alternatively, if your company is bringing a claim against you, our litigation and dispute resolution specialists can assist you to protect your interests and resolve any related disputes.

Our litigation and dispute resolution experts are highly rated and can help with a wide range of commercial disputes, including those between directors, partners and shareholders.