This guide explains what UK company law actually requires of directors, and where the personal risk lies.
The Seven Statutory Duties
The Companies Act 2006 codifies seven duties that every director of a UK company owes to that company. These are not optional guidelines. They are legal obligations:
1. Duty to act within powers. Directors must act in accordance with the company’s constitution (its Articles of Association) and only exercise their powers for the purposes for which they were conferred. A director who uses company funds for a purpose not permitted by the Articles may have acted in breach of this duty.
2. 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. This includes having regard to the long-term consequences of decisions, the interests of employees, business relationships, community and environmental impact, and the importance of maintaining a reputation for high standards of business conduct.
3. Duty to exercise independent judgement. Directors must make their own decisions and not simply follow the instructions of others — including major shareholders — without proper consideration. This duty does not prevent directors from following advice, but it does prevent them from rubber-stamping decisions without genuine engagement.
4. Duty to exercise reasonable care, skill and diligence. Directors are expected to apply both the care and skill that a reasonably diligent person would apply in their position, and the additional skill and experience that that particular director actually has. A director with a finance background, for example, will be held to a higher standard on financial matters than a director with no financial expertise.
5. Duty to avoid conflicts of interest. Directors must avoid situations where they have — or could have — a direct or indirect interest that conflicts with the interests of the company. This includes opportunities that the director becomes aware of through their position. The duty can be authorised by the board, but only if the Articles permit this.
6. Duty not to accept benefits from third parties. Directors must not accept any benefit from a third party that is given to them because of their position as director or because of something they have done or not done as director. This is a strict duty — it does not require proof that the director was influenced by the benefit.
7. Duty to declare interests in transactions. If a director is directly or indirectly interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors. This duty applies even if the interest does not amount to a conflict.
When Does Personal Liability Arise?
Beyond the statutory duties, personal liability can arise for directors in a number of specific circumstances:
Wrongful trading. If a company goes into insolvent liquidation and a director knew or should have known that there was no reasonable prospect of avoiding insolvency — but continued to trade and run up debts — they can be ordered to contribute personally to the company’s assets. This is one of the most significant personal risks for directors of financially distressed companies.
Fraudulent trading. Where a director has been party to carrying on a business with intent to defraud creditors, they can face criminal prosecution and personal liability. The intent element makes this harder to establish than wrongful trading, but the consequences are more severe.
Breach of fiduciary duty. If a director breaches one of the duties above and the company suffers loss as a result, the company — or in insolvency, the liquidator acting on behalf of creditors — can bring a claim against the director personally for the loss suffered.
Personal guarantees. Many directors of SMEs are asked to provide personal guarantees for company borrowing. This is a contractual assumption of personal liability, not a statutory one, but it is common and worth understanding clearly before you sign.
Tax obligations. Directors can be personally liable for certain company tax debts in specific circumstances — for example, where HMRC issues a Personal Liability Notice in connection with a company’s tax fraud.
Protecting Yourself
Being a director is not simply about signing documents. It requires active engagement, proper governance, and an understanding of what the law expects. Some practical steps:
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Read and understand your Articles of Association — know what powers you have and what they are for
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Attend board meetings and engage with the papers — non-executive directors are not exempt from liability simply because they are less involved in day-to-day management
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Declare interests — err on the side of disclosure; it is much harder to deal with an undisclosed conflict after the fact
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Take professional advice when the company is in financial difficulty — the moment you become aware that the company may not be able to pay its debts, you need legal advice
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Ensure the company has directors’ and officers’ (D&O) insurance — while this does not eliminate personal liability, it provides financial protection and covers the cost of defending claims
Saracens Solicitors: Corporate and Company Law Advice
Our corporate team advises directors, shareholders, and companies on the full range of company law obligations — from governance and compliance to shareholder disputes and restructuring. We also advise directors who are facing personal claims or regulatory investigations.
If you have questions about your duties as a director, or if your company is facing financial difficulty and you want to understand your personal position, contact us for a confidential consultation.
This blog is for general information only and does not constitute legal advice.
