Director's Duties & liability

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Business Dispute Resolution Article

03 February, 2022

Directors, shareholders and, indeed, the company itself are all separate legal personalities and entities, each of which assume separate legal rights and obligations. Directors are duty bound to promote their company's success and must not act in a way to diverge from this in favour of actions that promote their own personal interest.

But what are the specific duties a director owes? How and when does a director have personal liability for company obligations and liabilities? What is "piercing the corporate veil" and does this apply to directors?

This is a subject which every company director should be familiar with, both in terms of understanding their duties and how to avoid personal liability should the company fail, or other circumstances arise which lead to an investigation into the affairs of the company.

What are the Companies Act 2006 duties?

Sections 171 to 177 of the Companies Act 2006 (CA 2006) set out seven core general directors' duties which are as follows:

  • To act within their powers (s.171);
  • To promote the success of the company (s.172);
  • To exercise independent judgment (s.173);
  • To exercise reasonable care, skill and diligence (s.174);
  • To avoid conflicts of interest (s.175);
  • Not to accept benefits from third parties (s.176); and
  • To declare any interest in a proposed transaction or arrangement with the company (s.177).

In the most part, the general duties will come into force upon taking up office and end upon resignation as director. However, the duties contained in s.175 and s.176 continue to apply after the director has resigned their office.

Can a director be exempt from the general duties?

No. Section 232 CA 2006 makes it clear that any provision that purports to exempt a director of a company (to any extent) from any liability that would otherwise attach to the director in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void.

Who owes the general duties?

These general duties are owed to the company by (1) directors who are registered at Companies House and properly appointed to the board (known as de jure directors), (2) by persons who act as a director but who have not been appointed to the board (known as de facto directors); and (3) by 'shadow' directors (persons in accordance with whose directions or instructions the directors of a company are accustomed to act).

Aside from the company being able to enforce these general duties, it is also worth noting that shareholders are able to instigate 'derivative' proceedings against directors (on the company's behalf) under s.260 CA 2006, for alleged breach of a director's duty to promote the success of the company under s.172 CA 2006 and in particular in relation to actual or proposed acts or omission involving negligence, default, breach of duty and breach of trust by a director, former director, of shadow director.

What other duties and obligations apply to directors?

Aside from the statutory general duties, directors owe a number of other duties for and on behalf of the company they represent, including the following:

  • Directors owe fiduciary duties to the company. This concept broadly encompasses the obligation to act in its best interest, to safeguard its assets, to act with integrity and confidentiality and not to make a profit as director, unless authorised by the company's constitution. In essence, directors occupy a trustee-like position with regard to the company's assets.
  • In some instances, directors are also employees and will therefore owe specific employment-related obligations to the company as their employer.
  • A company's articles of association may also set out separate bespoke specific duties and obligations which apply to directors.
  • Under s.441 CA 2006 directors are under a duty to deliver accounts.
  • Directors may enter into direct legal relationships with third parties on behalf of or in connection with company business such as personal guarantee agreements.
  • Directors can also be personally prosecuted in certain circumstances for breaches of health and safety law and GDPR for example.
  • In the context of the insolvency of the company, a company director will be subject to other obligations and duties including cooperating with the insolvency practitioner during their investigations and the discharge of their office.
  • As a pre-cursor to insolvency, the way a director manages a company which is in potential financial distress will also come under scrutiny. Where an insolvency practitioner finds that a director falls short of their duties, they may be subject to personal claims for wrongful trading, misfeasance, breach of fiduciary duty and fraudulent trading. These claims may result in the director personally contributing to the insolvency and lead to disqualification proceedings.

What is piercing the corporate veil and does it apply to directors?

A shareholder is a separate legal entity to the company. However, the doctrine of "piercing the corporate veil" essentially means establishing personal liability on a shareholder for a liability which would ordinarily rest with the company and, thereby, going beyond the usual protection offered by a shareholder's limited liability and the separate legal entity of the company.

This typically arises in cases where a company's separate legal personality is being abused for the purpose of some impropriety.

The case of Petrodel Resources Ltd v Prest [2013] UKSC 34, established that the Court may, in certain situations, lift and pierce the corporate veil where a person was under an existing legal obligation or liability or subject to an existing legal restriction which they deliberately evaded or whose enforcement they deliberately frustrated by interposing a company under his control.

It therefore only applies generally to shareholders but could, of course, also affect those directors who are shareholders.

For more information contact Stephen McArdle in our Business Dispute Resolution department via email or phone on 0333 207 1142. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

Learn more about our Business Dispute Resolution department here

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