What are the duties of a company director and what happens if they are breached?

Company directors have a number of duties imposed on them under the Companies Act 2006 as well as under common and other laws. Failure to carry out directors’ duties can result in substantial penalties, including personal liability for any losses suffered by the company, its shareholders, and its creditors.

The main directors’ duties are those detailed in the Companies Act 2006 (the Act), although there is substantial additional legislation in other areas, such as insolvency and health and safety, which must also be observed. This article will focus on the obligations included in the act.

Directors’ duties included in the Companies Act 2006

Directors must act within their powers

While directors are given a certain amount of discretion to run the company as they see fit, they cannot act outside of the powers conferred on them by the company’s constitution, primarily its articles of association.

When exercising the powers given to them, they should act in the interests of the company and not in their own interests. For example, allocating too many shares to an individual with views sympathetic to the director may not be in the company’s best interests.

In addition, they may not exceed the limits of the powers and authority given to them.

Directors must promote the success of the company

In making decisions relating to the company, directors should consider whether their actions will promote the company’s success and benefit any shareholders and other stakeholders in the company.

The Act lists six factors that directors must have regard to in reaching decisions, which include consideration of employee interests, the long-term consequences of their proposed actions, and fostering business relationships with suppliers and customers.

However, where a company’s solvency is in doubt, the directors must consider the interests of the company’s creditors instead of the company itself.

Where a company becomes insolvent, directors can face personal difficulties where they have taken a small or nominal salary but taken additional funds on a regular basis. Such additional funds would be considered a director’s loan, and a dividend is usually declared at the end of the financial year to offset the director’s loan. However, dividends can only be paid out of available profits and if the company is insolvent, a dividend cannot be declared, and the director may be indebted to the company. For more information, see our article: The treatment of a director’s loan account in administration or liquidation: Can DLA’s be reclassified as remuneration?

Directors must exercise independent judgement

A director is required to make any decisions independently and not to favour any single shareholder or section of a business, for example, if a business merges and directors are appointed from both former enterprises.

In addition, a director cannot give away their decision-making power to another unless they retain the power to revoke this.

Directors must exercise reasonable care, skill and diligence

There are two parts to this duty. Firstly, a director should exercise the care, skill, and diligence that would be expected from someone doing the job to a professional standard.

Secondly, they must act in accordance with the knowledge, skill, and expertise that they themselves possess. This means that if a director has in-depth experience in a particular area, they will be expected to use it to the benefit of the company.

Directors must avoid conflicts of interest

A director must not only avoid direct and indirect conflicts of interest but also possible conflicts of interest. This could include awarding a contract to a friend or family member or using company information to benefit their own personal affairs.

Exceptions exist where the conflict cannot reasonably be regarded as likely to give rise to a conflict of interest and also where the situation has been authorised by the board of directors (excluding the director concerned), provided the company’s articles of association permit such authorisation.

Directors must not accept benefits from third parties

A director may not accept a benefit from a third party where it was offered because of the director’s position in the company or because of any actions they have the power to take as a director.

In practice, this means that a director should not accept a gift or an invitation to a hospitality event from someone who has a contract that may be offered to the company.

If it can be shown that no reasonable person would see a conflict of interest in accepting the benefit, it is acceptable; however, it is not always a clear-cut decision, and care should be taken before accepting any benefit.

Directors must declare any interest in a proposed transaction or arrangement with the company

If a director has a personal interest in a transaction, he must disclose this at a board meeting or in writing to each director before the relevant contract is entered into.

This could include making a deal to buy supplies from a business owned by a relative or a transaction with another company in which the director has a shareholding.

Consequences of breach of directors’ duties

If one of the above directors’ duties is breached, action can be taken against the director by the company or by a shareholder if they have suffered loss. This can be by way of court action or in some instances by way of an agreement with the director.

Consequences for the director include the following:

Removal from office

A director can be removed from office in the event that more than half of the shareholders vote for this. Removal can be permanent or temporary, depending on the severity of the breach in the view of the shareholders.

Return of company property

Where property has been inappropriately transferred or taken by a director, its return can be required.

Restitution of profits

Where a company has suffered a loss because of the director’s actions, the court can order that any personal profits made by the director in the transaction that breached his duty be returned to the company.

The setting aside of a transaction

The court may make an order setting aside a transaction or contract so that the situation is as though it had never been made.

An interim injunction

An injunction can be issued to prevent the director from continuing with the breach of their duty and to prevent further losses.

Damages or compensation

Where a director’s breach of duty has resulted in financial loss, a court can order payment of damages and/or compensation from the director personally. This means that a breach of directors’ duties can expose a director to personal liability and the possibility of losing personal assets, to include their home, as well as a risk of bankruptcy.

A fine under criminal law

Some breaches are considered so serious that they have been criminalised. An example is the requirement to keep and file the required company registers and accounts.

Case Law Highlights

Invenio Business Solutions Ltd & Anor v Goyal & Anor [2024] EWHC 1236 (Ch) — fiduciary honesty, disclosure, and stewardship

The High Court addressed a series of allegations arising from the conduct of the founding director and finance director of Invenio during and after the sale of the business. A central theme in the judgment was the reaffirmation that a director’s fiduciary obligations include a positive duty of candour, particularly where the director exercises stewardship over the company’s finances. The court stressed that the role of a finance director requires the highest standards of honesty and integrity: any irregularities, risks, or matters affecting the company’s financial position must be fully disclosed.

Although the court ultimately rejected the company’s attempt to classify the directors as “Bad Leavers,” it confirmed that non-disclosure itself can give rise to breach, even where no active dishonesty is proved. The case stands as a clear reminder that directors responsible for financial oversight must adopt an open, transparent approach in their dealings with the company and that failure to declare matters with a potential to influence corporate decision-making may breach fiduciary and statutory duties.

BHS wrongful trading & breach of duty judgment (2024) EWHC 1417 (Ch— care, skill, diligence and the creditor-focused dimension of s.172

The High Court’s findings in the BHS litigation mark a watershed moment in the enforcement of directors’ duties in distressed trading conditions. Former directors were held personally liable for wrongful trading and serious breaches of duty after authorising an onerous secured loan that exacerbated the company’s deteriorating financial position. The judgment demonstrates the courts’ willingness to scrutinise directors’ conduct rigorously when a company is approaching insolvency.

The decision reinforces that the duty of reasonable care, skill and diligence (s.174) requires directors to undertake careful assessment of financial risk, seek appropriate advice, maintain adequate records, and document the reasoning behind significant decisions. Crucially, the court affirmed that when a company is insolvent or on the cusp of insolvency, directors must prioritise creditor interests as part of the s.172 duty. The ruling highlights that passive or uninformed decision-making exposes directors to substantial personal liability, regardless of good intentions.

Saxon Woods Investments Ltd v Costa (Re Spring Media Investments Ltd) [2025] EWCA Civ 708 — the duty to promote the success of the company and good faith

The Court of Appeal considered whether a director had breached his statutory duty under section 172 of the Companies Act 2006 by deliberately delaying a company sale process and concealing that strategy from the board. The director argued that he genuinely believed thedelay would ultimately benefit the company by achieving a higher valuation.

The Court rejected that argument and held that the duty to promote the success of the company includes an objective requirement of honesty. A director’s subjective belief that they are acting in the company’s best interests will not protect them where they have deliberately misled fellow directors or withheld material information. The court emphasized that deliberately deceiving the board is, in almost all cases, incompatible with the requirement to act in good faith under section 172.

The judgment also confirmed that where shareholders have contractually agreed on what “success” looks like, in this case, working in good faith towards an agreed exit, a director who knowingly causes the company to depart from that agreed objective may be in breach of duty. The decision reinforces that directors cannot justify dishonest or unilateral decision-making on the basis that shareholders may “thank them later.”

Advice for company directors

Staying within the law as laid out in the Act is not always straightforward, and it is sometimes the case that directors’ duties are breached inadvertently. If you have any doubts as to the legality of a proposed transaction, you should seek legal advice before entering into it.

Contact us

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If you would like to talk to one of our expert legal team members about any queries you may have, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030, and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.