Becoming a company director carries more responsibility than many people realise. In England and Wales, directors are legally responsible for how a company is run and can be held personally liable if they fail to meet their duties. The role is not simply a title. It comes with strict legal obligations set out in legislation and enforced by the courts and regulatory bodies.
Many directors are appointed without fully understanding what the law requires of them. This can lead to serious consequences, including financial penalties, disqualification, and personal liability for company debts. Understanding director responsibilities is essential for protecting both the business and the individuals involved.
This article explains what a director is, what duties they owe under the law, and the risks of getting it wrong.
What is a company director
A director is a person appointed to manage the affairs of a company. Directors are responsible for making strategic decisions, ensuring compliance with the law, and acting in the best interests of the company.
In England and Wales, the main legal framework for directors is found in the Companies Act 2006. This legislation sets out statutory duties that apply to all directors, whether they are executive, non executive, paid, unpaid, or shareholder directors.
A director does not need formal qualifications, but they must be capable of carrying out the role responsibly. Even where day to day tasks are delegated, directors remain legally accountable for the company’s actions.
Importantly, directors owe their duties to the company itself, not to individual shareholders or employees.
The core legal duties of directors
The Companies Act 2006 sets out seven general duties that every director must follow. These duties are not optional and apply regardless of company size.
The most important duties include:
• Acting within powers
• Promoting the success of the company
• Exercising independent judgment
• Using reasonable care, skill, and diligence
• Avoiding conflicts of interest
Directors must act in accordance with the company’s constitution and only use their powers for proper purposes. They must act in good faith to promote the success of the company for the benefit of its members as a whole.
This includes considering the long term consequences of decisions, the interests of employees, relationships with suppliers and customers, the impact on the community, and the company’s reputation.
Directors must also avoid situations where their personal interests conflict with those of the company. This includes receiving benefits from third parties or being involved in competing businesses without proper authorisation.
Another key duty is to exercise reasonable care, skill, and diligence. This means directors must perform their role to the standard expected of a reasonably competent person in their position. The more experience or expertise a director has, the higher the standard expected.
Failure to comply with these duties can result in legal action by the company, shareholders, or insolvency practitioners.
Financial and personal liability risks
One of the biggest misconceptions is that limited companies fully protect directors from personal risk. While limited liability offers protection in many cases, directors can still be personally liable in a wide range of situations.
If a company becomes insolvent, directors must act in the best interests of creditors. Continuing to trade when a company cannot pay its debts may result in wrongful trading claims.
Directors can also be personally liable for:
• Breach of fiduciary duties
• Misuse of company funds
• Fraudulent trading
• Failure to keep proper accounting records
• Health and safety breaches
• Data protection violations
Directors who fail to file accounts or confirmation statements can face penalties and potential disqualification.
The Insolvency Service has the power to disqualify directors for up to fifteen years if they are found to be unfit to manage a company. Disqualified directors cannot act in management roles and may face criminal sanctions if they breach restrictions.
In some cases, directors may also face personal financial liability for unpaid taxes, particularly where there has been deliberate misconduct or negligence.
These risks apply even to small companies and family run businesses.
How directors can protect themselves
Understanding responsibilities is the first step, but directors must also take practical action to protect themselves and the company.
This includes ensuring proper governance structures are in place, maintaining accurate records, and seeking professional advice when making major decisions.
Directors should:
• Understand the company’s constitution
• Keep detailed board records
• Declare conflicts of interest
• Monitor financial health regularly
• Seek legal and financial advice
Regular training and compliance reviews help reduce risk and demonstrate responsible management.
Having clear shareholder agreements, service contracts, and internal policies also protects directors by setting expectations and decision making processes.
Professional advice is especially important when dealing with insolvency risks, major transactions, disputes, or regulatory investigations.
At Penerley, we advise directors and business owners on their legal responsibilities and risk exposure. We help clients put strong governance frameworks in place and navigate complex commercial decisions with confidence.
If you are a director or considering becoming one, contact Penerley today to ensure you understand your legal obligations and protect your position before problems arise.
