Written by Marcia Howards, Senior Associate Solicitor · SRA-regulated · Last reviewed 29 October 2026
Whether you are the director of a start-up, a family-owned business or an established company, understanding your legal duties is essential.
One of the most important obligations imposed on company directors is contained within Section 172 of the Companies Act 2006. The provision requires directors to act in a way they genuinely believe will promote the success of the company while taking account of employees, suppliers, customers, the environment and other stakeholders.
Failing to comply with these duties can expose directors to legal disputes, regulatory scrutiny and, in some cases, personal liability.
This guide explains Section 172, how it fits within the wider statutory duties of directors and what company directors should know to remain compliant.
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What Is Section 172 of the Companies Act 2006?
Section 172 requires a director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
The legislation recognises that directors should not only focus on immediate profits. Instead, they should make decisions that support the company’s long-term success and sustainability.
In practical terms, directors must balance shareholder interests with wider business considerations and demonstrate sound commercial judgement.
What Factors Must Directors Consider Under Section 172?
When making decisions, directors should have regard to:
The Long-Term Consequences of Decisions
Directors should consider whether a decision benefits the company beyond the next quarter or financial year.
A decision that creates a short-term gain but damages future profitability could raise concerns under Section 172.
The Interests of Employees
Employees are often central to a company’s continued success.
Directors should consider the effect their decisions may have on employee welfare, retention and engagement.
Relationships With Suppliers, Customers and Others
Maintaining strong commercial relationships is critical for many businesses.
Directors should consider the impact of decisions on key stakeholders and existing contractual relationships.
The Company’s Impact on the Community and Environment
Businesses increasingly face scrutiny regarding environmental and social responsibility.
Directors should be able to show that relevant factors have been considered when making significant decisions.
Maintaining High Standards of Business Conduct
A company’s reputation can be one of its most valuable commercial assets.
Directors should consider whether a proposed action aligns with ethical standards and accepted business practices.
Acting Fairly Between Shareholders
Directors must act fairly between shareholders and avoid giving improper preferential treatment to certain members.
Why Is Section 172 Important?
Section 172 is often referred to as the cornerstone of directors’ duties because it influences how directors approach nearly every significant business decision.
The provision applies to:
- Private limited companies
- Family businesses
- Owner-managed businesses
- Start-ups
- Joint venture companies
- Large corporates
Many shareholder disputes ultimately involve allegations that directors have failed to comply with their statutory responsibilities, including Section 172.
The Seven Statutory Duties of Directors
Section 172 forms part of a wider framework of statutory duties under the Companies Act 2006.
Section 171: Duty to Act Within Powers
Directors must act in accordance with the company’s constitution and only exercise powers for their proper purpose.
Section 172: Duty to Promote the Success of the Company
Directors must act in good faith to promote the company’s success for the benefit of its members as a whole.
Section 173: Duty to Exercise Independent Judgment
Directors should make independent decisions and avoid simply following instructions from third parties.
Section 174: Duty to Exercise Reasonable Care, Skill and Diligence
Directors are expected to meet reasonable standards of competence based on their role and expertise.
Section 175: Duty to Avoid Conflicts of Interest
Directors should avoid situations where personal interests conflict with the interests of the company.
Section 176: Duty Not to Accept Benefits From Third Parties
Directors should not accept gifts, benefits or incentives that could compromise their judgement.
Section 177: Duty to Declare Interests in Transactions
Directors must disclose any direct or indirect interest in a proposed transaction involving the company.
Examples of Potential Breaches of Section 172
Examples may include:
- Entering a transaction that benefits a director personally rather than the company.
- Diverting business opportunities away from the company.
- Failing to consider creditor interests during financial difficulty.
- Favouring one shareholder unfairly over another.
- Making decisions that could significantly damage the company’s reputation without adequate consideration.
Whether a breach has occurred will depend on the specific circumstances and evidence available.
Can Directors Be Personally Liable for Breaching Section 172?
Potentially, yes. While Section 172 focuses on directors’ duties, certain breaches can also create issues relating to directors’ personal liability, particularly where misconduct, conflicts of interest or insolvency concerns arise.
Although companies are separate legal entities, directors can face personal consequences in certain circumstances.
Examples may include:
- Claims brought by the company.
- Derivative claims brought by shareholders.
- Disqualification proceedings.
- Regulatory investigations.
- Allegations of breach of fiduciary duties.
Personal liability often arises where director misconduct overlaps with other legal duties or where directors fail to act honestly and in good faith.
Do Directors Owe Duties to Creditors?
Where a company is approaching insolvency, directors may need to place greater emphasis on creditor interests.
The duty to creditors has been reinforced through court decisions and is particularly important where there is a real risk of insolvency.
Directors should seek legal advice promptly if the company is experiencing financial distress.
How Can Directors Demonstrate Compliance With Section 172?
Good corporate governance can be invaluable.
Practical steps include:
- Keeping detailed board minutes.
- Recording the reasons behind significant decisions.
- Identifying stakeholder impacts.
- Undertaking appropriate due diligence.
- Managing conflicts of interest effectively.
- Obtaining professional advice when required.
- Ensure constitutional documents and shareholder agreements support effective corporate governance.
Proper documentation can become crucial if decisions are later challenged.
How Saracens Solicitors Can Help
Directors and shareholders regularly require advice regarding corporate governance, shareholder disputes, directors’ duties and potential liability.
Saracens Solicitors advises businesses, directors and shareholders on a broad range of company law matters, including governance issues, disputes and transactional work.
If you require advice regarding directors’ duties, shareholder rights or corporate governance obligations, our corporate law team can assist. Call our team on +44 (0)20 3588 3500, or press the Enquire button at the top of this page – we will get back to you promptly.
Frequently Asked Questions / Questions & Answers
What does Section 172 Companies Act 2006 mean? It requires directors to act in good faith in a way they believe is most likely to promote the success of the company for the benefit of its members as a whole.
Does Section 172 apply to small companies? Yes. The duty applies regardless of company size.
Can shareholders sue directors for breach of duty? In some circumstances, shareholders may bring derivative claims or pursue other legal remedies.
What is the most important duty of a company director? Many corporate lawyers regard Section 172 as one of the most significant duties because it influences how directors should approach decision-making.
Can a director be removed for breaching statutory duties? Potentially. Breaches may lead to shareholder action, board disputes, disqualification proceedings or litigation.
