What Are Director Duties?

For an overview of different business types in the UK, see Business Structures.

Every director of a UK company owes a set of statutory duties codified in sections 170 to 177 of the Companies Act 2006. These duties apply to all directors of companies registered with Companies House, whether the company is a private limited company, a public limited company or a community interest company.

Director duties are owed to the company itself, not to individual shareholders, employees or creditors (although duties to creditors can arise when the company is insolvent or near insolvency).

The Seven Statutory Duties

1. Duty to Act Within Powers (s.171)

A director must act in accordance with the company’s constitution, which primarily means its articles of association, and must only exercise powers for the purposes for which they were conferred.

This means directors cannot:

• Use company funds for purposes outside the company’s objects
• Issue shares to dilute a particular shareholder’s voting power for improper purposes
• Act outside the authority given to them by the articles or shareholder resolutions

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

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, the director must have regard to:

• The likely consequences of any decision in the long term
• The interests of the company’s employees
• The need to foster the company’s business relationships with suppliers, customers and others
• The impact of the company’s operations on the community and the environment
• The desirability of the company maintaining a reputation for high standards of business conduct
• The need to act fairly between members of the company

This is the broadest of the seven duties and requires directors to consider a wide range of stakeholder interests, not just short-term profit.

3. Duty to Exercise Independent Judgement (s.173)

A director must exercise independent judgement and not simply follow the instructions of a dominant shareholder, fellow director or any other person, unless:

• The company’s constitution allows the director to act on the instructions of others
• The director has entered into an agreement that restricts the future exercise of their discretion (for example, a shareholders’ agreement)

Even where a director acts on advice from lawyers, accountants or other professionals, the director must apply their own mind to the decision.

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

A director must exercise the care, skill and diligence that would be shown by a reasonably diligent person with:

• The general knowledge, skill and experience reasonably expected of a person carrying out the director’s functions (objective test)
• The actual knowledge, skill and experience that the particular director has (subjective test)

The standard is whichever is higher. A director with professional qualifications (such as an accountant or solicitor) is held to a higher standard than a lay director. This duty covers decisions about company accounts, financial management and all aspects of corporate governance.

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

A director must avoid situations in which they have, or could have, a direct or indirect interest that conflicts with the interests of the company. This applies particularly to the exploitation of:

• Business opportunities that the company could pursue
• Property, information or other assets of the company

This duty 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 other directors (in a private company, the articles must permit such authorisation).

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

A director must not accept a benefit from a third party that is conferred by reason of being a director or doing (or not doing) anything as a director. This includes:

• Gifts, hospitality or entertainment that could influence decision-making
• Commissions or kickbacks from suppliers or contractors
• Any form of inducement connected to the director’s role

This duty is not infringed if acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

7. Duty to Declare Interest in Proposed Transactions (s.177)

If a director has a direct or indirect interest in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors before the company enters into the transaction.

The declaration must be made:

• At a board meeting, or
• By written notice to the other directors, or
• By general notice declaring that the director has an interest in a specified body or person

For existing transactions, s.182 imposes a separate (but similar) duty to declare interests as soon as reasonably practicable.

Summary of the Seven Duties

Filing and Administrative Duties

Beyond the statutory duties above, directors have practical obligations to ensure the company complies with its filing requirements:

Companies House Filings

• File a confirmation statement at least once every 12 months
• File annual company accounts within nine months of the financial year-end (for private companies)
• Notify Companies House of changes to directors, the registered office, share capital and other prescribed matters within 14 days
• Maintain statutory registers (members, directors, persons with significant control)

HMRC Obligations

• File the Company Tax Return (CT600) within 12 months of the accounting period end
• Pay corporation tax within nine months and one day of the accounting period end
• Operate PAYE for employees and directors receiving remuneration
• File VAT returns if the company is VAT-registered
• Maintain proper accounting records for at least six years

Record Keeping

Directors must ensure the company keeps adequate accounting records that are sufficient to show and explain the company’s transactions and disclose the company’s financial position with reasonable accuracy at any time (s.386 Companies Act 2006).

Who is a Director?

The Companies Act 2006 does not comprehensively define “director” but includes anyone occupying the position of director, by whatever name called. This means the statutory duties can apply to:

• De jure directors — formally appointed and registered at Companies House
• De facto directors — people who act as directors without formal appointment
• Shadow directors — people in accordance with whose directions the directors are accustomed to act (s.251)

Shadow directors are subject to most of the general duties, which means a dominant shareholder or parent company controlling the board can owe director duties to the company.

Consequences of Breaching Director Duties

Civil Liability

A director who breaches their duties can face:

• Account of profits — the director must hand over any profit made from the breach
• Damages — compensation to the company for losses caused
• Injunction — a court order to prevent ongoing or threatened breaches
• Rescission — setting aside transactions entered into in breach of duty
• Restoration of company property — returning assets improperly taken

Disqualification

Under the Company Directors Disqualification Act 1986, a director can be disqualified from acting as a director for between 2 and 15 years for:

• Unfitness in connection with insolvency (s.6)
• Persistent breaches of companies legislation (s.3)
• Fraud in connection with winding up (s.4)
• Breach of competition law (s.9A)

Criminal Liability

Directors face criminal penalties for:

• Failing to file accounts or confirmation statements on time
• Fraudulent trading (s.993 Companies Act 2006)
• Making false statements to Companies House
• Failure to keep adequate accounting records

Practical Guidance for Directors

Board Meetings

• Hold regular board meetings and keep proper minutes
• Ensure all directors receive adequate information before making decisions
• Record the reasons for significant decisions to demonstrate compliance with s.172

Conflicts Management

• Maintain a register of directors’ interests
• Declare conflicts at the start of every board meeting
• Recuse from decisions where a personal interest arises
• Check the articles of association for any authorisation procedures

Insurance

• Consider Directors and Officers (D&O) insurance to protect against personal liability for alleged breaches
• D&O insurance does not cover fraud, criminal conduct or deliberate wrongdoing

Professional Advice

• Seek legal advice on complex transactions and potential conflicts
• Use professional advisers for accounting compliance and tax matters
• Document reliance on professional advice to support the defence of having acted with reasonable care

Related Concepts

• Companies House — the registrar of company directors
• Articles of association — the company’s constitutional document
• Company accounts — financial statements directors are responsible for
• Confirmation statement — annual filing directors must ensure is submitted
• Shareholders’ agreement — may impose additional obligations on directors