The Companies Act 2006: A Guide

The Companies Act 2006 is the statute that governs how UK companies are formed, run, and closed. For directors, the sections that matter most are the ones that define your duties, your liabilities, and what happens when those duties are breached.

We do not expect you to read all 1,300 sections. Most directors never will. But the seven general duties in sections 170 to 177 are the ones that will be cited against you if the company enters insolvency and the liquidator examines your conduct.

We have broken down the provisions that affect directors in financial difficulty, because those are the ones you need to understand before they are used against you, not after.

Quick Answer: What the Companies Act 2006 Means for Directors

The Act imposes seven general duties on every director (sections 170 to 177): act within your powers, promote the success of the company, exercise independent judgement, exercise reasonable care and skill, avoid conflicts of interest, not accept benefits from third parties, and declare interests in transactions.

These duties are owed to the company. When the company is insolvent or approaching insolvency, the duty to promote the company’s success is modified: you must act in the interests of creditors, not shareholders. This is the duty shift that creates wrongful trading exposure.

The Seven General Duties of a Company Director

Section 171: Act within powers. You must act in accordance with the company’s constitution (articles of association) and only exercise your powers for the purposes they were given. Using company resources for personal benefit, or exceeding your authority under the articles, is a breach.

Section 172: Promote the success of the company. You must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole. When the company is insolvent, this shifts to acting in creditors’ interests. We see this section cited in almost every wrongful trading case.

Section 173: Exercise independent judgement. You must not simply follow instructions from others (shareholders, co-directors, advisers) without applying your own judgement. This is particularly relevant for nominee directors and directors who defer entirely to a dominant co-director.

Section 174: Exercise reasonable care, skill, and diligence. The standard is both subjective (your actual knowledge and experience) and objective (the knowledge and experience a reasonably diligent person in your position would have). We find this is the section that catches directors who claim they “did not know” the company was in trouble. The objective test asks: should you have known?

Section 175: Avoid conflicts of interest. You must avoid situations where your personal interests conflict with the company’s, unless authorised by the other directors. We cover this in detail in our conflicts of interest guide.

Section 176: Not accept benefits from third parties. You must not accept benefits (gifts, hospitality, commissions) from third parties that are given because of your position as director, unless accepting them cannot reasonably give rise to a conflict of interest.

Section 177: Declare interest in proposed transactions. If you have any interest in a proposed transaction with the company, you must declare it to the other directors before the transaction proceeds.

The Companies Act Duty Shift to Creditors

Section 172(3), as clarified by the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25, confirms that when a company is insolvent or bordering on insolvency, directors must have regard to the interests of creditors.

The closer the company is to insolvency, the more weight creditors’ interests carry, until at the point of insolvency they become paramount.

We explain this because it is the legal foundation of wrongful trading claims. A director who continues to pay dividends to shareholders while the company is insolvent, or who prioritises shareholder interests over creditor interests in business decisions, is breaching section 172 as modified by the insolvency context.

The liquidator will assess every significant decision you made after the point where insolvency was probable against this standard.

Other Companies Act Provisions Directors Should Know

Section 386: Duty to keep accounting records. You must keep adequate accounting records that show the company’s financial position at any time. Failure to keep records is a ground for director disqualification and can be a criminal offence.

Section 251: Shadow directors. A person whose instructions the formally appointed directors are accustomed to follow is a shadow director. Shadow directors have the same duties and liabilities as appointed directors. We see this in group companies where a holding company director effectively runs subsidiaries without being on their boards.

Sections 1000 to 1034: Striking off and dissolution. The provisions governing voluntary strike-off, compulsory strike-off, and restoration of dissolved companies. Critical if you are considering dissolution as an alternative to liquidation.

Section 994: Unfair prejudice. A minority shareholder can petition the court if the company’s affairs have been conducted in a manner unfairly prejudicial to their interests. This is relevant in shareholder disputes and can interact with insolvency proceedings.

How the Companies Act Interacts With the Insolvency Act

The Companies Act governs how you run the company. The Insolvency Act 1986 governs what happens when the company cannot pay its debts.

The two interact at the point of insolvency: your Companies Act duties (particularly section 172) are modified by the insolvency context, and the Insolvency Act provides the enforcement mechanisms (sections 212 to 214, misfeasance and wrongful trading) that allow the liquidator to pursue you for breaches.

We tell directors: understand both statutes, because the liquidator uses both. A misfeasance claim under section 212 of the Insolvency Act is based on a breach of your Companies Act duties. The Companies Act defines the duty. The Insolvency Act provides the remedy.

Companies Act Steps to Take When in Difficulty

If your company is approaching insolvency, your Companies Act duties require you to act in creditors’ interests. In practice, this means: stop paying dividends, stop incurring unnecessary new debts, seek professional advice, and document every decision. Our guide on when to stop trading explains the practical threshold.

Company Debt connects directors with licensed insolvency practitioners who can assess your position against your Companies Act duties. A free, confidential consultation will clarify whether your conduct is defensible and what steps to take next.

FAQs on the Companies Act 2006 and Directors