In owner-managed businesses, directors often occupy multiple roles: shareholder, executive, and strategic leader. This overlap can create complexity in decision-making and accountability, especially when personal and corporate interests intersect. Understanding directors’ duties is essential not only for legal compliance but also for maintaining good governance, protecting the business, and shielding directors from personal liability.
These duties are not just theoretical obligations. They form the backbone of responsible leadership and are particularly relevant in smaller companies where directors may be deeply involved in day-to-day operations. This guide outlines the key statutory duties under the Companies Act 2006, recent regulatory developments, and practical steps directors can take to safeguard their position.
Why directors’ duties matter
Directors’ duties are designed to ensure that those in control of a company act in its best interests, uphold good governance, and avoid conflicts of interest. In owner-managed businesses, where directors are often also shareholders, these duties serve a dual purpose: protecting the company from mismanagement and safeguarding directors from personal liability. A clear understanding of these obligations is essential, particularly when navigating complex decisions, financial pressures, or disputes among stakeholders.
The statutory framework: duties under the Companies Act 2006
The Companies Act 2006 codifies seven general duties that apply to all directors. These duties are owed to the company itself, not to individual shareholders, and apply from the moment a person becomes a director until they cease to hold office. In some cases, the duties may continue beyond that point – for example, the duty to avoid conflicts of interest may persist in relation to opportunities or information acquired during the director’s tenure.
The seven general duties are:
- Section 171: Duty to act within powers
Directors must act in accordance with the company’s constitution and only exercise powers for the purposes for which they were conferred.
2. Section 172: Duty to promote the success of the company
Directors must act in good faith to promote the success of the company for the benefit of its members as a whole, considering long-term consequences, employee interests, relationships with suppliers and customers, environmental impact, and the company’s reputation.
3. Section 173: Duty to exercise independent judgment
Directors must make decisions independently, even when acting as a nominee of a shareholder or investor. Reliance on professional advice is permitted, but judgment must ultimately be their own.
4. Section 174: Duty to exercise reasonable care, skill and diligence
Directors must meet both objective and subjective standards of diligence, based on their role and experience. Executive directors are held to a higher standard than non-executive directors, but all must remain actively engaged.
5. Section 175: Duty to avoid conflicts of interest
Directors must avoid situations where their personal interests, or those of connected persons, could conflict with the interests of the company. Proper authorisation is required where conflicts arise.
6. Section 176: Duty not to accept benefits from third parties
Directors must not accept gifts or benefits that could compromise their impartiality. Benefits from the company itself or its group entities are generally excluded.
7. Section 177: Duty to declare interest in proposed transactions or arrangements
Directors must disclose any direct or indirect interest in proposed transactions with the company before the company enters into them.
Practical steps to safeguard your position
Directors who act responsibly and in accordance with their duties are generally protected from liability. However, ignorance is not a defence, and passive participation can be construed as complicity. To safeguard their position, directors should take proactive steps to stay informed and engaged.
Regular attendance at board meetings is essential, as is ensuring that meetings are properly minuted and decisions documented. Directors should make reasonable enquiries before voting or signing documents, and should not rely blindly on information provided by others. Where responsibilities are delegated, directors must ensure that the delegate is competent and trustworthy and must remain informed about their activities.
If a director disagrees with a course of action approved by the board, they should record their objection in writing, ideally in the board minutes. Seeking legal or professional advice is also advisable, particularly when the company is facing financial difficulty or entering into complex transactions.
Regulatory developments in 2025
Recent legislative changes have introduced new compliance obligations for directors. Under the Economic Crime and Corporate Transparency Act 2023 (ECCTA), from 18 November 2025 directors must verify their identity with Companies House. For more guidance on this development, see here.
In addition, the proposed Company Directors (Duties) Bill seeks to expand the scope of section 172 by requiring directors to balance shareholder interests with environmental and employee considerations. The Bill has completed its second reading in the House of Commons but has not yet progressed to the Committee Stage. While not yet law, it reflects a broader shift toward ESG-focused governance and may influence future expectations of directors’ conduct.
Consequences of breach
Breaching directors’ duties can have serious consequences. In most cases, the company itself is responsible for enforcing these duties, but shareholders may bring a derivative claim on the company’s behalf if the board fails to act. Such claims require court permission and must meet strict criteria, including demonstrating a prima facie case and showing that the conduct was not ratified by a majority of shareholders.
Directors found to be in breach may be required to account for profits, return company property, or face rescission of contracts. In some cases, they may be disqualified under the Company Directors Disqualification Act 1986 or held liable for inducing a breach of contract. Breach of duty may also be grounds for termination of a director’s service contract.
Relief from liability and protection
While companies cannot exempt directors from liability for negligence or breach of duty, they may offer limited protection. Directors can be indemnified for legal defence costs, provided they are successful, and may apply to the court for relief if they acted honestly and reasonably. Shareholders may also ratify certain breaches by passing an ordinary resolution, excluding votes from the director and connected members.
Companies may purchase directors’ and officers’ (D&O) insurance to cover liabilities arising from breach of duty, negligence, or default. This can provide an important safety net, particularly in high-risk sectors or complex governance environments.
Directors’ duties are not just legal obligations, but a framework for responsible leadership and sustainable business practice. For owner-managed businesses, where the lines between personal and corporate interests can easily blur, understanding and complying with these duties is essential. Doing so not only protects the company but also shields directors from personal liability and reputational harm.
If you are a director of an owner-managed business and would like tailored advice on your duties or how to manage potential risks, please contact a member of the Bates Wells team.