Directors’ duties under the Companies Act 2006

James Tong, Solicitor

A practical guide for SME business owners

If you are a director of a private limited company in England and Wales, you have legal duties that apply regardless of the size of your business. These directors’ duties are set out in the Companies Act 2006 and are a key part of good company governance for SMEs.

What are a director’s duties under the Companies Act 2006?

The Companies Act 2006 sets out seven general duties that every company director should understand:

• Act within powers – comply with the company’s constitution and only use powers for proper purposes
• Promote the success of the company – act in good faith for shareholders’ benefit, while considering long-term impact and stakeholders
• Exercise independent judgment – make decisions yourself, not simply follow others
• Exercise reasonable care, skill, and diligence – meet both an objective standard and one reflecting your experience
• Avoid conflicts of interest – prevent situations where personal and company interests clash
• Not accept benefits from third parties – avoid inducements linked to your role
• Declare interests in transactions – disclose any personal interest in company dealings

Common breaches of directors’ duties in SMEs

In practice, two issues often cause problems for directors of owner-managed and growing businesses:

Conflicts of interest

In many SMEs, decisions are made quickly and informally. That can make it easier for conflicts of interest to arise without being properly identified or recorded. Taking up a business opportunity personally, entering into arrangements with connected parties, or failing to disclose a personal interest can all put a director in breach of duty.

Acting outside authority

It is not unusual for directors to overlook restrictions in the company’s articles of association or any shareholder agreement. Decisions such as issuing shares, approving major contracts, or taking on borrowing may require specific authority. If that authority is missing, the decision can still be challenged even where the director believed they were acting in the company’s best interests.

Can a company director be personally liable?

One of the most common misconceptions among SME directors is that limited liability always protects them personally. In reality, a breach of directors’ duties can lead to personal consequences, including:

1. Personal liability to compensate the company for losses;
2. Transactions being set aside;
3. Disqualification as a director;
4. In insolvency scenarios, misfeasance or wrongful trading claims.

These risks are often greater in SMEs, where governance can be less formal and directors are more closely involved in day-to-day decision-making, especially when the business is under financial pressure.

How directors can reduce the risk of breaching their duties

• Document decisions with clear board minutes
• Check your articles before taking key actions
• Declare conflicts early and fully
• Take legal advice where transactions are unusual, high value or if you are unsure of the duties you should be considering.

For company directors, understanding these duties is not just about legal compliance. It is also about making better decisions, protecting the business, and reducing the risk of personal liability.

If you would like advice on directors’ duties, shareholder issues or corporate governance, please contact the corporate team at Kuits on 0161 832 3434 , or email us at [email protected].