Director Duties: What You’re Bound By Whether You Know It or Not
Most directors know they have responsibilities. Far fewer could tell you what those responsibilities actually are, where they come from, or what happens when they’re breached.
That gap between knowing duties exist and understanding what they require is where a significant proportion of the director disputes I deal with begin.
This piece is an attempt to close that gap. Not exhaustively — the Companies Act 2006 codified seven general duties and each has its own depth — but practically, in a way that’s useful to anyone who sits on a board or is about to.
Where the duties come from
Before 2006, director duties were largely a creature of case law — equitable principles developed by courts over centuries, overlaid with statutory provisions. The Companies Act 2006 codified the main duties into a single framework, set out in sections 171 to 177. The codification was intended to make the law more accessible. Whether it succeeded is debatable, but the framework is now at least in one place.
It’s worth knowing that the duties are owed to the company — not to shareholders individually, not to employees, not to creditors, though creditors acquire increasing relevance as a company approaches insolvency. That distinction matters when disputes arise about who can enforce them and how.
That distinction is particularly important in director and shareholder disputes, where the conduct complained of may affect an individual shareholder but the legal wrong itself may belong to the company.
The seven director duties in practice
The duty to act within powers — section 171 — requires directors to act in accordance with the company’s constitution and only exercise powers for the purposes for which they were conferred. In practice this is most commonly engaged when directors take significant decisions without proper authority, or use company resources for purposes the articles don’t sanction.
The duty to promote the success of the company — section 172 — is the one that generates the most discussion. Directors must act in the way they consider, in good faith, most likely to promote the success of the company for the benefit of its members as a whole.
The section sets out a non-exhaustive list of factors to have regard to, including long-term consequences, employee interests, and the impact on the community and environment. It’s a subjective test — good faith, not objective reasonableness — but that doesn’t make it toothless. A director who makes decisions for personal benefit rather than the company’s benefit is in difficulty regardless of how they characterise their intentions.
The duty to exercise independent judgment — section 173 — means directors can’t simply rubber-stamp decisions made by others, whether that’s a dominant co-director, a majority shareholder, or an external adviser. Each director is individually responsible for the decisions of the board.
The duty to exercise reasonable care, skill and diligence — section 174 — sets both a subjective and an objective floor. The standard is that of a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of someone in that role, or the actual knowledge, skill and experience of that particular director if higher. The subjective element means an experienced finance director is held to a higher standard on financial matters than a director with no financial background.
Sections 175, 176 and 177 deal with conflicts. The duty to avoid conflicts of interest, the duty not to accept benefits from third parties, and the duty to declare interests in proposed transactions. These are the duties that generate the most litigation in commercial disputes, and they’re the ones most frequently misunderstood.
What breach actually looks like
I’m currently instructed in a case that illustrates how these duties operate together rather than in isolation. A co-director and shareholder, while still holding office and owing duties to the company, downloaded and removed confidential documents — client lists, pricing information, commercially sensitive data. He then used that information to set up a competing business, actively diverted customers who had relationships with the original company, and poached staff on the way out.
That’s not one breach. It’s several, running concurrently.
The confidential information point engages the duty to avoid conflicts of interest and may also amount to a misuse of company property and a breach of obligations of confidence. The competing business engages the conflict duty again and, depending on the circumstances, the duty to promote the success of the company. The customer diversion and staff poaching compound the position.
What cases like this demonstrate is that director duties don’t operate in neat separate compartments. The same course of conduct can engage multiple duties simultaneously, and the remedies available to the company — account of profits, equitable compensation, injunctive relief — reflect that breadth.
The duties don’t stop at resignation
One of the most common misconceptions I encounter is that a director’s obligations end when they leave. They don’t, not entirely.
The duty to avoid conflicts of interest and the duty not to misuse confidential information have a post-termination dimension. Information that was confidential when a director held office doesn’t become fair game the moment they resign. A business opportunity that properly belongs to the company doesn’t become available for personal exploitation simply because the director has stepped down before pursuing it.
The precise scope of post-termination obligations depends on the facts — the nature of the information, the role the director held, the terms of any service agreement — but the principle is well established. Resignation is not a clean break from everything that came before it.
Why this matters before something goes wrong
Director duties are not just a framework for resolving disputes after the fact. They’re a governance tool. A board that understands what each director is individually required to do — and what each is prohibited from doing — is a board that makes better decisions, manages conflicts properly, and is less likely to generate the kind of conduct that ends up in litigation.
In smaller companies, particularly owner-managed businesses, the duties are often observed instinctively without ever being articulated. That works until it doesn’t — until a relationship breaks down, a director starts acting in their own interests, or a dispute arises about whether a particular decision was properly authorised. At that point, the framework matters enormously.
Understanding it beforehand is considerably cheaper than understanding it afterwards.
Director duties sit at the core of most disputes arising within companies and between their directors and shareholders. At the very least, they are lurking loudly in the background of a dispute about something else.
If something in this article has prompted a question about your own position — as a director, a shareholder, or both — it’s probably worth thinking through properly.