Business Management · Separate legal personality, directors' duties, shareholders and partnerships

Directors' Duties and Liabilities under the Companies Act 2013

Updated 11 October 2026 · Fact-checked

Directors' duties are the legal obligations directors owe to the company. They include fiduciary duties (good faith, proper purpose, no conflict of interest, no secret profit) and a duty of care, skill and diligence. Section 166 of the Companies Act 2013 sets out these duties. Breach can lead to compensation, restoring profits, rescission of contracts, or penalties.

Understand Directors' Duties and Liabilities

A company is a separate legal person, but it can only act through people. Directors are those people. Because they control the company's property and decisions, the law makes them responsible for how they use that power.

There are two broad groups of duties. Fiduciary duties are about loyalty. The director must act in good faith, in the best interests of the company, for its stated objects and for the benefit of its members as a whole, and also with regard to employees, shareholders, the community and the environment. The director must not put personal interest ahead of the company's. Duty of care, skill and diligence is about competence. The director must work with the care that a reasonably diligent person would use, and must use any higher skill or knowledge the director actually has.

The key difference is the question each asks. A fiduciary duty asks: were you loyal and honest? The duty of care asks: were you careful and competent? You can be honest and still careless. You can be skilled and still disloyal.

Section 166 of the Companies Act 2013 lists the main duties. These include acting in accordance with the articles of association, acting in good faith, exercising duties with due care, skill and diligence and independent judgment, avoiding situations of direct or indirect conflict with the company's interest, not achieving or attempting to achieve undue gain or advantage, and not assigning the office. If a director achieves undue gain, the director is liable to pay the company an amount equal to that gain. A breach of section 166 is also punishable with a fine.

Liability for breach can be civil, such as paying compensation for loss, accounting for profits, or having a contract set aside. It can also be a statutory penalty. Directors can also face liability under other provisions for matters such as misleading statements or fraud. The company, and in some cases its shareholders, can bring the claim, since the duty is owed to the company.

This topic links closely to agency, trusts and conflicts of interest. A director is treated like an agent of the company and like a trustee of its assets for many purposes. The same ideas appear in the IAI's thinking on professional conduct.

Key rules to remember

Section 166, Companies Act 2013: Director's duties = act per articles + good faith + due care, skill, diligence and independent judgment + avoid conflict + no undue gain + no assigning office; This is the core list. Learn the headings, not the section wording.
Fiduciary duty test: Loyalty = best interests of company + proper purpose + no conflict of interest + no secret profit; Focus is on honesty and loyalty, not on whether the decision was wise.
Duty of care test: Standard = reasonably diligent person with the general knowledge, skill and experience expected of the role, and any higher actual skill the director has; This is partly objective and partly subjective. The actual skill can only raise the standard.
Undue gain rule: Liability = amount of undue gain, payable to the company; Section 166 provides that a director who achieves undue gain must pay the company an amount equal to it.
Remedies for breach: Compensation for loss, account of profits, rescission of contract, injunction, statutory penalty; Choose the remedy that fits the facts: loss, gain or an ongoing act.

How to solve Directors' Duties and Liabilities questions

Use this method on any scenario question about a director's conduct. Apply it to each fact, not to the case as a whole.

1Identify who the director is and to whom the duty is owed. In most cases the duty is owed to the company.
2Pick out the act or omission that may be wrong, such as a deal, a decision, or a failure to supervise.
3Decide whether the issue is about loyalty or competence. Loyalty points to fiduciary duty and conflict. Competence points to care, skill and diligence.
4State the relevant duty in plain words and link it to section 166 of the Companies Act 2013.
5Apply the duty to the facts. Ask whether there was a personal interest, a secret profit, a wrong purpose, or a lack of reasonable care.
6Check for defences or relief, such as proper disclosure, approval in line with the law and articles, or reasonable reliance on competent advice.
7State the consequences: who can claim, and what remedy is likely, such as compensation, return of gain or a penalty.
8Give a short conclusion that answers the question asked.

Quickest way: Loyalty or care: two-question check

When to use it: Use this for multiple-choice questions and short scenario parts where you have only a minute or two.

Ask: did the director benefit personally or have a conflict? If yes, name fiduciary duty and conflict of interest.
Ask: was the director careless, uninformed or inactive? If yes, name duty of care, skill and diligence.
Match the remedy: gain means account of profits, loss means compensation, a contract tainted by conflict means it may be set aside.
Write one line linking to section 166 and stop.

Common mistakes in Directors' Duties and Liabilities

Treating fiduciary duty and duty of care as the same thing.
Both are listed together in section 166 and both are called 'duties of directors'.
Fix: Remember loyalty versus competence. Fiduciary duty is about honesty and conflicts. Duty of care is about reasonable care and skill.
Saying directors owe their duties directly to each shareholder.
Shareholders own the company, so students assume the duty runs to them.
Fix: The general rule is that the duty is owed to the company. Section 166 also requires directors to consider shareholders, employees, the community and the environment, but the main claim belongs to the company.
Assuming a bad business decision is automatically a breach.
Students focus on the loss and ignore the standard of care.
Fix: Ask whether the director acted with reasonable care and in good faith. A poor outcome alone is not a breach.
Forgetting that actual skill raises the standard.
Students learn only the 'reasonable person' test.
Fix: State both parts: the standard expected of a person in that role, and any higher skill the director actually has. For example, a qualified accountant on the board is judged with that skill.
Quoting section numbers or penalties from memory without being sure.
Students try to add detail to earn marks.
Fix: Quote section 166 for directors' duties and describe the other points in plain words. A correct plain statement scores better than a wrong number.
Listing duties without applying them to the facts.
Students memorise lists and write them out in full.
Fix: Pick only the duties raised by the facts. Name the duty, apply it in one or two sentences, then state the consequence.

Worked examples

Example 1

Meera is a director of a private company. She learns that the company plans to buy a plot of land. She secretly buys the plot herself and later sells it to the company at a higher price, without telling the board. Advise on her position.

Show the solution

The duty is owed to the company, and Meera is a director.
The issue is loyalty, not competence. She used her position to make a personal gain.
Section 166 requires directors to avoid conflict with the company's interest and not to achieve undue gain or advantage.
She did not disclose her interest to the board, so there was no informed approval.
Consequences: the company can claim the profit she made, and she is liable to pay an amount equal to the undue gain under section 166. The company may also seek to set the sale aside, and a fine may apply.

Answer: Meera has breached her fiduciary duty by acting in conflict and making an undue gain. She must pay the company an amount equal to the gain, and the contract may be set aside.

Example 2

The board of a company approves a large loan to a new borrower. Director Kiran never reads the papers, skips every board meeting for a year and signs whatever is sent to him. The borrower defaults and the company suffers a loss. Is Kiran in breach? Which duty is relevant?

Show the solution

The facts show no personal gain or conflict. Kiran did not act dishonestly.
The issue is competence, so the relevant duty is care, skill and diligence under section 166.
Standard: a reasonably diligent person in his role would read the papers, attend meetings and ask questions.
Kiran did none of this. Failure to supervise and to exercise independent judgment is a lack of due care.
Consequence: the company can seek compensation for the loss his lack of care caused. He must also show the loss was linked to his failure, not only to the borrower's default.

Answer: Kiran has breached the duty of care, skill and diligence, not a fiduciary duty. He may be liable to compensate the company for loss caused by his failure.

Exam tips

In scenario questions, first decide whether the facts show disloyalty or carelessness. This one choice sets up the whole answer.
Always name section 166 of the Companies Act 2013 when you list directors' duties, and use plain words for the rest.
State who the duty is owed to. Marks are often lost by saying 'shareholders' when the answer is 'the company'.
In multiple-choice questions, watch for options that overstate the rule, such as 'a director is liable for any loss'. Liability needs a breach.
End each written answer with the remedy. Match it to the facts: gain, loss or a tainted contract.

Practice questions from Separate legal personality, directors' duties, shareholders and partnerships

Directors' Duties and Liabilities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Directors' Duties and Liabilities: frequently asked questions

What does section 166 of the Companies Act 2013 cover?

Section 166 sets out the duties of directors. These include acting under the articles, acting in good faith, using due care, skill, diligence and independent judgment, avoiding conflicts of interest, not making undue gain and not assigning the office. Learn them as a short list of headings.

What is the difference between fiduciary duty and duty of care for directors?

Fiduciary duty is about loyalty. The director must act in good faith and not put personal interest ahead of the company. The duty of care is about competence. The director must act with the care and skill of a reasonably diligent person. A director can breach one without breaching the other.

How are directors held liable for breach of duty?

The company can claim against a director for compensation, for return of any gain, or to have a tainted contract set aside. Section 166 also provides a fine for breach and requires a director who makes undue gain to pay an equal amount to the company. Other laws may add further liability.

Is a director liable for every loss the company suffers?

No. A director is liable only if there is a breach of duty that caused the loss. If the director acted honestly and with reasonable care, a poor result does not by itself create liability.