A Director's 7 Legal Duties in Plain English

You became a director in about ten minutes online, and nobody sat you down and explained what came with it. Sections 171 to 177 of the Companies Act 2006 hand every director seven general duties from day one; they are owed to the company rather than to you or to the shareholders individually; and two of them are where owner-managers actually get hurt — conflicts of interest, and how you behave when the company is running out of money.

The seven duties

Act within your powers (s171) — stick to the company's constitution and use your powers only for their proper purpose.
Promote the success of the company (s172) — act in good faith to benefit the members as a whole, with an eye on the long term, employees, suppliers, customers, community and reputation.
Exercise independent judgment (s173) — decide for yourself rather than rubber-stamp what someone else tells you to do.
Exercise reasonable care, skill and diligence (s174) — to the standard expected of someone in your role, raised by any special expertise you actually have.
Avoid conflicts of interest (s175) — including exploiting the company's property, information or opportunities.
Do not accept benefits from third parties (s176) — no perks handed to you because of your position.
Declare an interest in a proposed transaction (s177) — tell the board before the deal is done.

They apply to every director of every company: the sole director of a one-person consultancy as much as the board of a large firm. They also catch anyone who genuinely acts as a director without the title — a shadow or de facto director — so keeping your name off the paperwork while calling the shots does not avoid them.

Who they are owed to, and why that bites

The duties are owed to the company, which is a separate legal person from you even when you own every share. Its money is not your money. In a bust-up it is the company that brings the claim — and a co-shareholder can bring it in the company's name through a derivative claim over money taken out improperly, an opportunity diverted, or a conflict never declared. In practice the most common route is a liquidator, because insolvency is when somebody finally reads the history. "It's my company, so I can do what I like with it" is the sentence that gets directors into trouble more than any other, and the separation it ignores is exactly what gives you limited liability in the first place.

Conflicts: declare it before the decision, in writing

The conflict duties are the ones that catch otherwise honest directors. You must avoid situations where your interests clash with the company's — including taking for yourself an opportunity, property or information that came to you through the company — you must not take benefits from third parties because of your position, and you must declare a personal interest in a proposed transaction before it is done.

The fix is administrative rather than dramatic: a two-line written declaration and a board minute, made before the decision. That turns a breach into a properly authorised transaction. Resigning does not clear the decks either — the duty not to exploit a company opportunity or misuse confidential information picked up as a director can outlast your resignation, and stepping down does not wipe out liability for what you did while in post.

In practice — illustrative example

The side deal that became a conflict

The director of a small events company is offered a venue-management contract that only came her way because of the company's contacts. She takes it personally rather than through the company and does not mention it to her co-director. When it surfaces months later it is a breach of the duty to avoid conflicts and not to exploit the company's opportunities, and the profit can be claimed back for the company. A two-line declaration and a board sign-off at the time could have let her take the deal cleanly.

Insolvency: the point at which the duty changes

Once insolvency is a real prospect, the duty to promote the success of the company for the members gives way to a duty to consider the interests of creditors, and three things become personally dangerous: continuing to trade while running up debts you cannot pay, paying yourself or a connected creditor ahead of others, and disposing of an asset at an undervalue. Wrongful trading liability runs from the point you knew, or ought to have concluded, that insolvent liquidation was unavoidable.

This is specialist territory and outside what Buzz Legal does. If insolvency is a real risk, speak to a licensed insolvency practitioner now rather than after the next payment run. Acting early is the thing that protects you.

Where personal liability actually comes from

Limited liability protects you from the company's ordinary debts. It does not protect you from the consequences of your own conduct. Directors can be personally liable for breach of duty, for wrongful or fraudulent trading, for unlawful dividends paid where there were insufficient distributable profits, for certain health and safety and tax failures, and wherever they have given a personal guarantee — which most owner-managers have done on a lease or a facility without ever thinking of it as a legal exposure. Disqualification is a separate consequence again.

What to actually write down

Minute board decisions, even in a one-director company: what was decided, why, and what was considered. A paragraph is usually plenty.
Record declarations of interest in writing before the relevant decision, not afterwards.
Keep the dividend paperwork together and dated at the time — management accounts showing distributable profits, a dividend voucher and a minute.
Keep company and personal money strictly separate, and treat the director's loan account as a real account rather than an afterthought.
Keep filings, accounts and statutory registers up to date at Companies House.

When a decision is questioned three years later, records written at the time are the difference between a judgement call and an allegation.

What to do next

If you have co-owners and no shareholders' agreement, that is the job to do this month: it sets out how the owners deal with each other alongside the statutory duties. A shareholder agreement starts at £1,250 +VAT including a read-through of your existing articles to check the two documents do not contradict each other. Director service agreements, share transfer paperwork and a governance tidy-up are all non-reserved work at a fixed price agreed in writing before anything starts — book a legal review.

Three things sit outside that, and it is better to hear it now. Tax advice on share structures and dividends goes to your accountant. Insolvency goes to a licensed insolvency practitioner. Any claim brought against a director is contentious work for RHF Solicitors (SRA no. 324115). To read further, start with shareholder agreements or whether your company needs one.

This is general legal information, not advice on your situation. For advice tailored to your business, book a legal review. Buzz Legal provides non-reserved business legal support; reserved legal activities are carried out by RHF Solicitors, authorised and regulated by the SRA (no. 324115).

Common questions

Do these duties apply to a sole director?

Yes. The general duties in sections 171 to 177 of the Companies Act 2006 apply to every director, including the only director of a one-person company, and they also catch shadow and de facto directors — people who act as directors without ever being appointed. For a sole director three of the seven do most of the work in practice: acting within powers, promoting the success of the company, and exercising reasonable care, skill and diligence. The conflict and disclosure duties matter more once there is someone else to answer to, but they still bite: a sole director contracting with their own company still has to declare and record the interest.

Can a director be personally liable?

Yes, in specific circumstances, and limited liability does not protect you from them. Directors can be personally liable for breaching their duties, for wrongful or fraudulent trading in the run-up to insolvency, for unlawful dividends paid where there were insufficient distributable profits, for certain health and safety and tax failures, and wherever they have given a personal guarantee — which most owner-managers have done on a lease or a facility without ever thinking of it as a legal exposure. Disqualification is a separate consequence again. The corporate shield protects you from the company's ordinary liabilities; it does not protect you from the consequences of your own conduct as a director.

What actually happens if I breach a duty?

The consequences depend on the breach, but the usual remedies are accounting for a profit you were not entitled to, compensating the company for its loss, having a transaction set aside, or, near insolvency, a personal contribution to the company's assets. The claim belongs to the company, so it is brought by the company itself, by a liquidator once one is appointed, or by a shareholder acting in the company's name through a derivative claim. Liquidators are the most common route in practice, because insolvency is when someone finally examines the history. Most breaches are avoidable with a timely declaration of interest, a board minute, and company money kept separate from your own.

What is the difference between director duties and a shareholders' agreement?

The statutory duties govern how you must behave as a director, and they are owed to the company itself. A shareholders' agreement governs how the owners deal with each other — share transfers, decisions, dividends, deadlock, what happens when someone leaves. They answer different questions and sit alongside each other. In an owner-managed company the same people wear both hats, which is where the confusion starts: a decision that suits you perfectly well as a shareholder can still breach your duty as a director if it is not in the company's interests. If you have co-owners, you want the duties understood and the agreement written down.

My company might be insolvent. Does anything change?

Significantly. Once insolvency is a real prospect, the duty to promote the success of the company for the benefit of members gives way to a duty to consider the interests of creditors, and the practical consequences are immediate: continuing to trade while running up debts you cannot pay, paying yourself or a connected creditor ahead of others, or disposing of an asset at an undervalue can each expose you personally. Wrongful trading liability runs from the point you knew, or ought to have concluded, that insolvent liquidation was unavoidable. This is specialist territory and outside what we do — take advice from a licensed insolvency practitioner quickly. Acting early is what protects you.

What records should a director actually keep?

Enough to show the decision was properly made. Minute board decisions, even in a one-director company, with a short note of what was decided, why, and what was considered — a paragraph is usually plenty. Record declarations of interest before the relevant decision rather than afterwards. Keep the paperwork behind dividends: management accounts showing distributable profits, a dividend voucher and a minute, all dated at the time. Keep company money and personal money separate and treat the director's loan account as a real account rather than an afterthought. When a decision is questioned three years later, contemporaneous records are the difference between a judgement call and an allegation.

Can Buzz Legal help with this?

With some of it. Director service agreements, shareholder and founder agreements, reviewing your articles against what the owners have actually agreed, and share transfer paperwork are all non-reserved work we do — a shareholder agreement starts at £1,250 +VAT. What sits outside: tax advice on share structures and dividends, which goes to Buzz Accounting or a tax specialist; insolvency advice, which needs a licensed insolvency practitioner; and any claim brought against a director, which is contentious work for RHF Solicitors (SRA no. 324115). If you are worried about a decision you have already taken, get advice before the next one rather than after the one that went wrong.

A director's seven legal duties, in plain English