Directors legal duties – What every company director must know

Directors legal duties – What every company director must know

Understanding directors legal duties is a critical responsibility for anyone involved in running a company. Whether you are a newly appointed director of a startup or an experienced business leader in an established firm, the legal framework that governs your role is not optional. It is a set of binding principles and obligations that exist to protect the company, its shareholders, creditors, employees, and the public interest. This guide outlines the key legal duties directors must observe under English and Welsh company law, the practical consequences of breaching them, and how directors can remain compliant in an increasingly regulated landscape.

The legal framework behind directors duties

Directors’ legal duties are codified in the Companies Act 2006, the the key piece of company law legislation in England and Wales. Before this legislation, most directors’ responsibilities were based on case law precedent. The Companies Act formalised seven core duties that all directors must follow, regardless of company size or sector. These apply equally to all types of directors, including executive and non-executive directors, shadow directors, and de facto directors.

Who qualifies as a director?

Under English and Welsh law, a director is any individual who occupies the position of director, by whatever name they are called. This includes not only formally appointed directors listed at Companies House but also:

• Executive directors – Those involved in the day-to-day management of the company.
• Non-executive directors – Appointed to provide oversight and strategic advice but not involved in the day-to-day running of the business.
• Shadow directors – Individuals whose instructions the board routinely follows, even if not formally appointed.
• De facto directors – Persons acting as directors without official appointment.

All types of directors carry the same legal obligations and potential liabilities.

The seven statutory directors duties

The following seven duties form the backbone of directors responsibilities under the Companies Act 2006:

1. Act within powers (Section 171) – Directors must act in accordance with the companys articles of association and only exercise powers for the purposes they were given.
2. Promote the success of the company (Section 172) – Directors must act in good faith to benefit the company as a whole, considering factors like long-term consequences, employee interests, environmental impact, and the companys reputation.
3. Exercise independent judgment (Section 173) – Directors must think for themselves and not simply follow others, even when they act on advice or under delegation.
4. Exercise reasonable care, skill and diligence (Section 174) – Directors must demonstrate the care and competence expected from someone with their knowledge and experience.
5. Avoid conflicts of interest (Section 175) – Directors must avoid situations where personal or other interests might conflict with those of the company.
6. Not accept benefits from third parties (Section 176) – Directors must not accept any form of benefit offered by third parties that could reasonably be seen to influence their decisions.
7. Declare interest in proposed transactions (Section 177) – Directors must fully disclose any direct or indirect interest in proposed company transactions or arrangements.

Case example: A misstep in compliance

Consider a scenario where a director of a mid-sized manufacturing company is offered a consultancy role with a supplier, promising generous compensation. The director does not disclose this relationship to the board and proceeds to award a long-term contract to the supplier. This represents a breach of Sections 175 and 176 — conflict of interest and accepting benefits from third parties. Once discovered, the board sought legal action, and the director was forced to repay the suppliers gains and resign. The company also faced reputational damage. This example underlines how even seemingly minor decisions can lead to major legal exposure if directors fail to follow the law.

Consequences of breaching directors legal duties

Directors who breach their legal duties can face serious repercussions, both civil and criminal. The consequences depend on the nature and severity of the breach, and may include:

• Disqualification from acting as a director (under the Company Directors Disqualification Act 1986).
• Personal liability for company debts in cases of wrongful or fraudulent trading.
• Requirement to repay profits made from undisclosed interests or conflicts.
• Criminal charges for serious misconduct such as fraud or concealment.

It is important to note that ignorance is not a defence. Directors are expected to be proactive and informed in discharging their responsibilities.

Additional responsibilities and practical duties

Beyond the statutory obligations, directors are expected to comply with a wide range of legal and regulatory requirements that affect how a company is run. These include:

• Filing confirmation statements and annual accounts with Companies House
• Ensuring tax returns and payments are up to date with HMRC
• Overseeing compliance with employment law, health and safety legislation, and GDPR
• Maintaining accurate financial records and avoiding trading while insolvent
• Properly convening and documenting board and shareholder meetings

Failure to uphold these duties can lead to penalties from regulators and potentially lead to the company being struck off the register at Companies House.

Changes ahead: ID verification and regulatory shifts

The UK government is implementing further reforms under the Economic Crime and Corporate Transparency Act 2023. Soon, all new and existing directors will need to verify their identity with Companies House. This move is designed to clamp down on fraudulent companies and improve corporate transparency. Directors should monitor further developments closely and ensure timely compliance with any new changes and requirements.

Fosters Solicitors is a registered Authorised Corporate Service Provider (ACSP), authorised by Companies House to carry out identity verifications on behalf of clients. For more advice on these requirements and assistance with ID verification, our dedicated Corporate team is here to guide you every step of the way.

Best practices to stay compliant as a director

To protect yourself and your company, it is advisable to take the following steps:

• Regularly review the company’s articles of association and board policies to ensure they are up to date with the latest corporate governance and statutory requirements.
• Maintain transparent communication within the board, especially on conflicts and interests.
• Record all board decisions and resolutions in formal minutes, which should be kept for 10 years.
• Seek legal advice where duties are unclear or where conflicts may arise.
• Undertake formal director training if new to the role.

Compliance should not be viewed as a box-ticking exercise but as a foundation of sound governance and business integrity. For tailored legal advice or assistance with corporate governance requirements, speak with our Corporate team.

FAQ

What are directors’ legal duties in England and Wales?

Directors’ legal duties in the UK are outlined in the Companies Act 2006 and include seven core obligations such as acting within powers, promoting the success of the company, and avoiding conflicts of interest.

Can a director be personally liable for company debts?

Yes, a director may be personally liable if they trade while insolvent or breach their legal duties, particularly in cases of wrongful or fraudulent trading.

Do non-executive directors have the same legal duties?

Yes, non-executive directors have the same legal duties as executive directors and are equally accountable under the Companies Act 2006.

What happens if a director fails to declare a conflict of interest?

Failure to declare a conflict of interest may lead to legal action, repayment of any personal gain, and potential disqualification from acting as a director.

Are directors required to verify their identity?

Under upcoming reforms in the Economic Crime and Corporate Transparency Act, all company directors will be required to verify their identity with Companies House.

This article was produced on the 14th July 2025 for information purposes only and should not be construed or relied upon as specific legal advice.