Checkmate – understanding directors’ duties and risk

• 3 June 2026
• News
• Commercial and corporate disputes

A company’s directors are the key individuals responsible for the conduct of its affairs. Their conduct is regulated largely through their directors’ duties. Breaches of those duties are therefore a common subject for disputes.

Below we address:

1. Who are a director’s duties owed to?
2. What are those duties?
3. What are the consequences of breach?
4. What should be considered first if there is a suspected breach?

This article forms part of our Checkmate – your essential guide to commercial disputes series, a collection of practical insights designed to help businesses navigate common dispute scenarios with clarity and confidence. Explore the full guide here.

1. Duties to who?

A director’s duties are generally owed to the company itself rather than to third parties, for example, its shareholders or creditors. Generally, this means that it is only the company itself that can pursue directors for any breaches (although see the final section below for some qualifications).

2. What are a directors’ duties?

Acting within powers

Directors must act in accordance with the company’s “constitution”, broadly defined. Acts that are inconsistent with the company’s articles of association or certain shareholder resolutions (for example, special resolutions) will breach the duty. So too, however, will certain acts outside the directors’ powers under the general law, for example, making unlawful distributions.

As well as acting within their powers, directors must also exercise those powers only for the purposes for which they are given. An act that is within a director’s powers but motivated by an improper purpose will breach the duty, even if done in good faith.

Acting in the company’s best interests

Directors must 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 (i.e., its shareholders) as a whole.

The duty is subjective in that a director’s conduct is assessed against what they knew and thought at the relevant time. However, the duty is also objective in that:

• In seeking to act in the company’s interests, a director must have regard to various specific factors, so far as relevant to the act in question. These factors are of intuitive relevance to the company’s interests and include, for example, its relationships with third parties, the interests of its employees and its market reputation.
• All directors’ actions are subject to the fundamental requirement of good faith. The touchstone is honesty and this is judged objectively by the standards of “ordinary decent people”. For example, a director who lies to their fellow directors will rarely be honest.

Exercising independent judgment

A director is required to make their own decisions, and not simply to carry out the wishes of others, for example, the company’s shareholders or its other directors.

Significantly, this does not prevent directors from relying on specialist advice, provided that they exercise their own judgment when doing so; indeed, they may be required to seek advice – see below.

Exercising reasonable care

Directors must exercise reasonable care, skill and diligence. The standard is both objective and subjective: a director is required to exhibit the expertise expected of a director in their position and also (if a higher bar) the expertise that they actually possess. For example, a finance director with computing expertise would be expected to exhibit expertise in both finance and computing.

Where directors lack expertise in the matter under consideration, exercising reasonable care may well require them to obtain specialist advice, for example, from lawyers or accountants.

“No conflict” duty

A director must avoid any situation in which the company’s interests conflict or may conflict with their own. In particular (but not exclusively), directors are prohibited from exploiting any property, information or opportunity that has come to them as a director.

While this is an exacting test, the duty will not be infringed where the situation cannot reasonably be regarded as likely to give rise to a conflict i.e., where is no “real sensible possibility” of conflict. It would be unlikely, for example, that a director would breach the duty by making an investment in a company in a different industry that it was in theory possible (but highly unlikely) that the company might compete with if it diversified its business. It is also generally possible for any conflict that does arise to be authorised by the company’s other directors.

The “no conflict” duty is unusual is carrying on even once a director has left office. At this stage, however, it is narrower and only prevents the director from exploiting any “property, information, or opportunity” that came to them when in post. “Opportunity” in this context is generally thought to require the existence of a “maturing business opportunity” i.e., a developed opportunity that the company itself was actively pursuing.

Third party benefits

A director is not permitted to accept benefits presented to them by third parties either for doing or not doing anything as a director or simply because they are a director. This duty is related to the “no conflict” duty. Similarly to that duty, receipt of benefits is permitted where the situation cannot reasonably be regarded as likely to give rise to a conflict. However, unlike with that duty, the receipt of otherwise impermissible benefits cannot be authorised by fellow directors.

Transactions or arrangements with the company

A director who is interested in a proposed transaction or arrangement with the company is required to declare it to their fellow directors. However, no declaration is required if the situation cannot reasonably be regarded as likely to produce a conflict (as above) or if the other directors are aware or should be aware of the director’s interest.

The “creditor duty”

As noted above, a director is generally required to act in the interests of the company’s members i.e., its shareholders. However, when a director knows or should know that the company is insolvent or borderline insolvent, they must also give appropriate weight to the interests of creditors. [1] The appropriate weight increases as the insolvency position worsens until eventually creditor interests become paramount. It is uncertain exactly when this point arrives, but it is probably when insolvent liquidation or administration has become inevitable.

3. Consequences of breach

Directors’ breaches of duty can often be consented to or formally ratified by a company’s shareholders, thereby absolving the director of liability. However, there are various exceptions, for example, where the breach is dishonest or unlawful or is a breach of the creditor duty.

If it is not possible to authorise or ratify a breach, the main potential consequence is an action by the company against the director, seeking one of more of: the setting aside of the relevant transaction; compensation for loss; an account of any profits made from the breach; or an injunction.

It certain scenarios, other parties can pursue an action on behalf of the company against its directors, for example, shareholders (who may bring a derivative action in the company’s name) and liquidators (when the company is in liquidation).

Breaches of directors’ duties are also sometimes relied upon indirectly in support of other claims, for example, in unfair prejudice petitions, whereby a particular shareholder or class of shareholders alleges that the company has treated them unfairly.

4. Priority considerations in the event of a suspected breach

Where a director appears to have misconducted themself, the following issues are worth considering at the outset:

• Has the director potentially breached the company’s articles of association or any shareholder resolutions, exploited any company property or information or received any benefits from third parties? If so, these are likely to be the most straightforward breaches of duty. In other scenarios, for example where the director appears not to have conducted themself with reasonable skill, the issue may be more nuanced and uncertain. It is also worth remembering that breaches of directors’ duties are one of only a number potentially relevant claims where a director has misconducted themself.
• Assuming there is a breach duty, what position do you hold in relation to the company? If you are a fellow director or other party with conduct of the company’s affairs, you may be able to bring an action on the company’s behalf; if not, you may be unable to do so, although any breaches of duty may still be relevant to other claims you can bring.
• If you are the director that may have breached their duties, can you obtain the approval of your fellow directors or the company’s shareholders so as to absolve yourself from liability? If not, does the company have D&O (directors’ and officers’) insurance? If so, this may cover the legal costs of defending any potential claim.

This insight is one of a series of Checkmate articles exploring the core themes that underpin modern commercial disputes, from post-acquisition claims to shareholder conflicts and directors’ duties.

To access the full guide and build a broader understanding of the risks and strategic considerations across these areas, visit here.

[1] Also relevant here are the rules on wrongful trading which regulate trading carried out by directors in an insolvency context.