Directors’ Duties & Responsibilities

Every UK company director has seven statutory duties under the Companies Act 2006. They are not guidelines. They are legal obligations, and breaching them creates personal liability that limited liability does not protect you from.

We find that most directors of small companies cannot name more than one or two of these duties. That is a problem, because the duties are the standard against which the liquidator measures your conduct if the company enters insolvency.

A director who can demonstrate they understood and followed their duties has a defensible position. A director who did not know what their duties were has a harder case to make. We have set out all seven below in plain English, with the practical implications for directors of companies in financial difficulty.

Quick Answer: The Seven Duties of a UK Company Director

1. Act within your powers (section 171)
2. Promote the success of the company (section 172): shifts to creditor interests when insolvency is probable
3. Exercise independent judgement (section 173)
4. Exercise reasonable care, skill, and diligence (section 174)
5. Avoid conflicts of interest (section 175)
6. Not accept benefits from third parties (section 176)
7. Declare interest in proposed transactions (section 177)

These duties are owed to the company, not to individual shareholders or creditors. But when the company is insolvent or approaching insolvency, section 172 is modified: you must act in the interests of creditors. This is the duty shift that underpins every wrongful trading claim and every conduct investigation.

Director Duty 1: Act Within Your Powers (Section 171)

You must act in accordance with the company’s constitution and exercise your powers only for the purposes they were given. In practice, this means: do not use company money for personal expenses, do not exceed the authority the articles give you, and do not take actions that the shareholders have not authorised.

We see breaches of this duty most commonly in small companies where the distinction between the director’s personal money and the company’s money has blurred over years.

A director who uses the company debit card for personal shopping, pays personal bills from the company account, or takes cash without proper documentation is breaching section 171 as well as creating an overdrawn director’s loan account that the liquidator will pursue.

Director Duty 2: Promote the Success of the Company (Section 172)

This is the most important duty for directors of companies in financial difficulty. 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 solvent, “success” means shareholder value. When the company is insolvent or bordering on insolvency, the duty shifts: you must act in the interests of creditors.

The Supreme Court confirmed this in BTI 2014 LLC v Sequana SA [2022]. The closer the company is to insolvency, the more weight creditors’ interests carry. At the point of insolvency, they become paramount.

We stress this because the duty shift is what creates wrongful trading exposure. A director who pays a dividend to shareholders when the company is insolvent is prioritising shareholder interests over creditor interests.

A director who continues to trade, accumulating more debt, when insolvent liquidation is unavoidable is failing to minimise creditor losses. Both are breaches of the modified section 172 duty.

Director Duty 3: Exercise Independent Judgement (Section 173)

You must not simply follow instructions from others without applying your own judgement. This applies even if the instruction comes from a majority shareholder, a co-director, or a professional adviser. You can take advice, but the decision must be yours.

We see this duty breached in family companies where a dominant founder gives instructions to a nominee director (a spouse, a child, a friend appointed to the board). The nominee rubber-stamps every decision without questioning it.

If the company enters insolvency, the nominee director is held to the same standard as the founder. “I just did what they told me” is not a defence. It is a confession of breaching section 173.

Director Duty 4: Exercise Reasonable Care, Skill, and Diligence (Section 174)

The standard is both subjective and objective. You are measured against: (a) your actual knowledge, skill, and experience, and (b) the knowledge, skill, and experience that a reasonably diligent person carrying out your functions would have. The higher of the two applies.

We find this is the duty that catches directors who say “I did not know the company was insolvent.” The objective test asks: should you have known? If a reasonably diligent director in your position, with access to the same information, would have recognised the insolvency, your lack of awareness is not a defence. It is a failure of diligence.

We tell directors: read your management accounts. Ask questions when the numbers do not look right. If you do not understand the accounts, get them explained. The duty requires you to be engaged with the company’s financial position, not to be a financial expert, but to be a diligent non-expert who asks the right questions.

Director Duties 5 to 7: Conflicts, Benefits, and Declarations

These three duties deal with conflicts of interest and personal benefits. We cover them in detail in our conflicts of interest guide.

In summary: avoid situations where your interests conflict with the company’s, do not accept benefits from third parties that arise from your position, and declare any interest you have in a proposed transaction with the company.

What Happens When Directors Breach Their Duties

Breaches of directors’ duties can result in:

• Misfeasance claims (section 212, Insolvency Act): The liquidator recovers losses caused by the breach. This is a personal liability.
• Wrongful trading (section 214): A personal contribution order for the increase in creditor losses during the period you should have stopped trading.
• Director disqualification: 2 to 15 year ban from acting as a director.
• Account of profits: You hand over any personal profit made from the breach.
• Transaction reversal: Conflicted transactions can be voided by the company or the liquidator.

We find that most directors who face consequences in insolvency are not charged with one dramatic breach. They face a pattern of small failures: late filings, poor records, continued trading past the tipping point, selective creditor payments, and undeclared conflicts. The pattern, assessed cumulatively, is what triggers disqualification and misfeasance claims.

How Directors Fulfil Their Duties When in Difficulty

1. Recognise the duty shift. When insolvency is probable, you must act in creditors’ interests. Stop paying dividends. Stop prioritising shareholders.
2. Seek professional advice. The date you sought advice is evidence of diligence under section 174.
3. Keep proper records. Board minutes, financial accounts, decision documentation. These are your evidence of compliance.
4. Do not make selective payments. Pay in the ordinary course only. No preferences to connected parties.
5. Declare conflicts. If you have any interest in any transaction with the company, declare it formally.

Company Debt connects directors with licensed insolvency practitioners who can assess your conduct position. A free, confidential consultation will tell you whether you are fulfilling your duties and what to do if the company is approaching insolvency.

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