Fiduciary Duties of Directors: The 7 Legal Duties Explained

You must act in the way you consider, in good faith, would be most likely to promote the company’s success for the benefit of its members as a whole. 

When making decisions, you should consider: 

• the likely long-term consequences; 
• the interests of employees;
• relationships with suppliers, customers and others; 
• the company’s effect on the community and environment; 
• the importance of maintaining high standards of business conduct; 
• the need to act fairly between the company’s members. 

This does not mean every decision must succeed. Directors are allowed to make reasonable commercial judgements. What matters is that the decision is made honestly, for the proper purpose and after considering the relevant information. 

Directors are expected to meet both an objective and a personal standard. 

You must demonstrate the care, skill and diligence reasonably expected from someone performing your role. If you possess greater knowledge or specialist experience, that may raise the standard expected of you. 

In practice, this can include: 

• keeping up to date with the company’s financial position; 
• reading board papers and management accounts; 
• questioning information that appears incomplete or unrealistic; 
• attending and contributing to board meetings; 
• obtaining appropriate advice when necessary; 
• monitoring work that has been delegated. 

A director cannot necessarily avoid responsibility by saying that financial, tax or administrative work was left to someone else. 

You must avoid situations in which your personal interests conflict, or could conflict, with those of the company. 

A conflict could arise if you: 

• have an interest in a competing business; 
• use company information for personal benefit; 
• divert a business opportunity away from the company; 
• influence the company to enter into an arrangement that benefits you or someone connected to you. 

Some conflicts may be authorised, depending on the company’s articles and the circumstances. They should be disclosed promptly and dealt with through the proper board or shareholder procedure. 

The seven general duties are not a complete list of everything a director must do. 

Depending on the company and its activities, directors may also be responsible for ensuring that the company: 

• keeps adequate accounting records; 
• prepares and files annual accounts; 
• files its confirmation statement; 
• maintains accurate Companies House information; 
• complies with its tax obligations; 
• observes employment, health and safety, data protection and sector-specific rules; 
• protects company assets; 
• completes any required director identity verification. 

Work can be delegated to an accountant, employee or other adviser, but the directors’ underlying responsibility does not automatically disappear. 

The seven general duties continue to apply, but the way directors approach their decisions changes when the company is insolvent or insolvent liquidation or administration becomes probable. 

At that stage, directors must increasingly consider the interests of creditors as a whole. The more serious the company’s financial position becomes, the greater the weight that should usually be given to creditor interests. 

This does not automatically mean that the company must stop trading at the first sign of difficulty. Continuing to trade may sometimes preserve value or support a realistic rescue. However, directors should not take unreasonable risks with creditors’ money or continue incurring liabilities without properly assessing whether the company can meet them. 

If the company is struggling, directors should: 

• obtain reliable and current financial information; 
• monitor cash flow and creditor pressure closely; 
• hold regular board meetings; 
• record the information considered and reasons for decisions; 
• avoid disposing of assets for less than proper value; 
• avoid favouring selected creditors without understanding the implications; 
• take appropriate insolvency advice. 

Read our detailed guide to directors’ duties when facing insolvency for a fuller explanation.

A limited company is normally responsible for its own debts. Being a director does not, by itself, make you personally responsible for everything the company owes. 

However, personal financial exposure can arise in certain circumstances. Depending on the conduct and the loss caused, a director may be required to: 

• compensate the company; 
• repay or restore company money or property; 
• account for a personal profit; 
• contribute towards losses connected with wrongful or fraudulent trading; 
• meet a debt covered by a personal guarantee. 

A liquidator or administrator may also examine directors’ decisions and transactions if the company enters formal insolvency. 

Personal liability is not an automatic consequence of every mistake or unsuccessful business decision. The facts, the director’s knowledge, the decision-making process and the effect on the company will all matter. 

You can read more in our guide to when a director may be personally liable for company debts. 

The consequences depend on the duty breached and the circumstances. 

Possible outcomes can include: 

• a claim requiring the director to compensate the company; 
• repayment of money or restoration of company property; 
• surrender of a profit made through the breach; 
• reversal or prevention of a transaction; 
• removal from office; 
• director disqualification where the wider conduct demonstrates unfitness; 
• investigation by an insolvency office-holder or public authority. 

Certain behaviour may also amount to misfeasance, wrongful trading or a criminal offence. These are separate legal issues and should not be treated as automatic consequences of an ordinary breach of duty. 

Directors should consider: 

1. Reviewing current management accounts and cash-flow forecasts. 
2. Holding board meetings when important decisions are required. 
3. Recording the alternatives considered and reasons for the decision. 
4. Declaring personal interests before relevant transactions. 
5. Checking the company’s articles before exercising significant powers. 
6. Asking questions rather than relying unquestioningly on another director. 
7. Seeking professional advice when the company’s solvency is uncertain. 

Keeping minutes does not make a poor or improper decision acceptable, but clear records can demonstrate that directors considered the relevant information and acted in good faith.