PastPaperHero | Corporate governance and compliance - Rights, duties, and powers of directors

Learning Outcomes

This article outlines the rights, duties, and powers of company directors under the corporate governance and compliance framework in England and Wales, including:

the status and appointment of de jure, de facto, and shadow directors, and the minimum eligibility requirements;
the allocation of management powers under the articles, board decision‑making mechanics, and directors’ authority to bind the company, including the effects of ss 39–40 CA 2006;
the general duties in ss 171–177 CA 2006, focusing on proper purpose, promotion of success and creditor interests near insolvency, independent judgment, and the objective/subjective care, skill, and diligence standard tested on SQE1;
the law on conflicts of interest, third‑party benefits, and disclosure of interests in transactions, with emphasis on shareholder approvals and the impact of provisions such as MA 14;
the consequences of breach, shareholder ratification, court relief, members’ powers to remove directors, and personal exposure to wrongful and fraudulent trading, misfeasance, and disqualification.

SQE1 Syllabus

For SQE1, you are required to understand the corporate governance and compliance framework concerning the rights, duties, and powers of company directors, with a focus on the following syllabus points:

The process for appointing and removing directors, including special notice and the prohibition on written resolutions for removal.
The general duties of directors under CA 2006 (ss 171–177) and how they reflect and develop common law/equitable fiduciary duties (s 170(4)).
Directors’ authority to bind the company, the effect of s 39 (capacity) and s 40 (protection of good-faith third parties), and constitutional limitations.
Board decision‑making (Model Articles (MAs) on quorum, voting, written board decisions) and shareholder direction of the board by special resolution (MA 4).
Situations requiring shareholder approval for directors’ actions: substantial property transactions (s 190), long-term service contracts (s 188), loans and related arrangements (s 197 and associated provisions), and payments for loss of office (ss 215–222).
Conflicts management: avoiding unauthorised conflicts (s 175), restrictions on accepting third‑party benefits (s 176), and declaring interests in proposed/existing transactions (ss 177 and 182), including MA 14 consequences for quorum/voting.
Consequences of breach: equitable/common law remedies (s 178), shareholder ratification (s 239), and court relief (s 1157).
Shareholders’ power and process to remove directors (s 168–169), the role of Bushell v Faith clauses, and potential contractual consequences.
Personal exposures in insolvency: wrongful trading (s 214 IA 1986), fraudulent trading (s 213 IA 1986), misfeasance (s 212 IA 1986), and disqualification under the CDDA 1986.
Scope of duties for de jure, de facto, and shadow directors (ss 250–251), and practical compliance/reporting obligations (registers, filings).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

Which section of the Companies Act 2006 outlines the director's duty to advance the success of the company?
1. s 171
2. s 172
3. s 174
4. s 175
True or false? A director's duty to exercise reasonable care, skill, and diligence under s 174 CA 2006 involves only a subjective test based on that specific director's actual knowledge and experience.
Can shareholders remove a director by ordinary resolution even if the director's service contract has 3 years left to run?
What type of resolution is generally required for shareholders to ratify a director's breach of duty?

Introduction

Directors are central to company governance and management. They exercise substantial powers under the company’s constitution, yet are constrained by statutory and fiduciary duties, approval regimes, and potential personal liabilities. An accurate understanding of the allocation of power between board and members (including how members can direct the board or remove directors), the standards imposed by CA 2006 ss 171–177, and the interface with insolvency and disqualification law is essential. This article sets out the framework within which directors operate: how they are appointed, how they bind the company, when shareholder approval is needed, how duties are policed, and what consequences follow when directors fall short.

Appointment and Status of Directors

A company must have appointed directors to manage its business. The definition and requirements surrounding directors are key starting points.

Who is a Director?

The CA 2006 defines a director broadly.

Key Term: Director
Includes any person occupying the position of director, by whatever name called (s 250 CA 2006).

This covers formally appointed directors (de jure), those who act as directors without valid appointment (de facto), and those whose instructions or directions the board habitually follows (shadow directors). The courts look at substance rather than titles: undertaking functions reserved to directors, participating at a senior level in directing affairs, and exercising real influence may indicate de facto/shadow status. In practice, the labels can overlap; the same individual may be both de facto and shadow depending on their conduct.

Key Term: De Jure Director
A director validly appointed in accordance with the articles and the CA 2006, and recorded at Companies House.

Key Term: De Facto Director
A person who acts and is treated as a director but has not been validly appointed; the court assesses whether they undertook functions which can only properly be discharged by a director and assumed the status and responsibilities of a director.

Key Term: Shadow Director
A person in accordance with whose directions or instructions the directors are accustomed to act (s 251(1) CA 2006). Professional advisers acting in an advisory capacity are excluded unless they cross the line into direction/control (s 251(2)).

For SQE1 purposes, remember many statutory duties and liabilities apply to de facto and shadow directors. General duties “apply to shadow directors where and to the extent that the corresponding common law rules or equitable principles so apply” (s 170(5) CA 2006).

Appointment Process

The first directors are usually named in the application for incorporation (Form IN01). Subsequent appointments depend on the company’s articles of association. The Model Articles for private companies (MAs) allow appointment by either an ordinary resolution of the shareholders or a decision of the directors (MA 17). Directors may also hold executive roles under separate service contracts (MA 19). It is common to convene a first board meeting after incorporation to adopt internal procedures (bank mandates, accounting reference date, auditors if required), allot initial shares, and authorise the use of a trading name.

Key Term: Articles of Association
The company’s constitutional rulebook, governing director/member powers and processes (CA 2006, s 18). Model Articles apply by default unless bespoke articles are filed (s 20).

Once appointed, the company must notify Companies House within 14 days (Form AP01 for individuals, AP02 for corporate directors) and update the internal register of directors (s 162 CA 2006) and register of directors’ residential addresses (s 165 CA 2006). Those registers may be kept at the registered office or on the central register.

Key Term: Persons with Significant Control (PSC)
Individuals or legal persons with >25% shares/votes, the right to appoint/remove a majority of directors, or significant influence/control. Companies must maintain a PSC register (Part 21A CA 2006).

Minimum Number and Eligibility

Private companies must have at least one director (s 154(1) CA 2006); public companies must have at least two (s 154(2)).
At least one director must be a natural person (s 155), and human directors must be at least 16 (s 157).
Certain persons are disqualified by statute (e.g., undischarged bankrupts, disqualified individuals under the CDDA 1986; an auditor of the company cannot serve as director: see CA 2006 s 1214).
The prohibition on corporate directors is subject to commencement and exemptions set by secondary legislation; always check the current position at the time of practice.

Directors may resign (MA 18(f)), retire under article provisions (e.g., rotation in PLCs), or cease to hold office on specified events (MA 18(b)–(d)).

Powers of Directors

Directors derive their powers primarily from the company’s articles.

General Management Power

MA 3 confers broad management powers: “Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.” The board therefore controls day‑to‑day decisions and strategic direction unless the constitution or statute reserves matters to the members.

Decision-Making

Directors typically make decisions collectively at board meetings by passing board resolutions. Written board decisions outside a meeting are permitted if all directors indicate agreement (MA 8), and the Model Articles set the quorum at two (MA 11) unless the company has only one director (MA 7(2)).

Key Term: Board Resolution (BR)
A decision made by the directors, usually by a simple majority vote at a quorate board meeting (MA 7), or unanimously in writing (MA 8).

The chair may have a casting vote if the articles so provide (in the default Model Articles for private companies, no casting vote is provided; some tailored articles include one). The company’s constitution should be construed to give business efficacy, not to produce commercial absurdity.

Delegation

Directors can delegate powers to individuals or committees (MA 5). Delegation must be supervised; it does not absolve the board of responsibility for ensuring delegated powers are exercised lawfully and for proper purposes.

Limitations and Shareholder Involvement

Directors’ powers are not absolute; they are limited by:

The company’s constitution (articles and “resolutions and agreements affecting the company’s constitution” under s 29).
Statutory provisions requiring shareholder approval for certain decisions:
- Substantial property transactions with directors/connected persons (s 190 CA 2006).
- Long-term service contracts (guaranteed term over two years) (s 188).
- Loans, quasi‑loans, and credit transactions for directors (ss 197–214).
- Payments for loss of office (ss 215–222).
Members’ direction of the board by special resolution (MA 4). An ordinary resolution cannot be used to override powers granted to directors in the articles.

Historic case law illustrates the balance of power: where the articles confer general management on directors, members cannot override by ordinary resolution (Automatic Self‑Cleansing Filter Syndicate Co v Cuninghame); and article‑based vetoes must be respected (Salmon v Quin & Axtens). If the board is unable or unwilling to act, powers may revert to members to secure the company’s functioning (Barron v Potter).

Authority to Bind the Company

Directors act as agents for the company. Authority may be:

Actual (express in the constitution or service contract, or implied from role and course of dealing).
Apparent (ostensible) authority where the company represents (by words or conduct) that a director has authority and a third party relies on that representation.

Section 39 CA 2006 provides that the validity of acts done by a company cannot be called into question on grounds of lack of capacity due to constitutional limitations. Section 40 protects persons dealing with a company in good faith by deeming the directors’ power to bind the company free of constitutional limitations; a third party is not required to inquire into internal procedures. Good faith is presumed unless contrary proof is shown, but insiders (e.g., directors with knowledge of irregularity) may not benefit from the protection. Members can restrain ultra vires action before a legal obligation arises (s 40(4)).

Directors' Duties

The CA 2006 codifies the general duties directors owe to the company (s 170(1)). Common law/equitable principles remain relevant to interpretation and application (s 170(4)).

Duty to Act Within Powers (s 171)

Directors must act in accordance with the company’s constitution and only exercise powers for the purposes for which they were conferred (the “proper purpose” doctrine). Improper use includes issuing shares or deploying powers predominantly to influence voting or control rather than a genuine corporate purpose (e.g., capital raising). The court will examine the primary purpose of the decision; a collateral motive to dilute a member’s influence may render the action a breach even if a valid secondary purpose exists.

Duty to Advance the Success of the Company (s 172)

Directors must act in the way they consider, in good faith, most likely to advance the success of the company for the benefit of its members as a whole. Section 172(1) sets out non‑exhaustive factors to which directors must have regard, including:

Likely long-term consequences.
Interests of employees.
Relationships with suppliers/customers.
Impact on community and environment.
Reputation for high standards of business conduct.
Fairness between members.

The test is subjective (the way “he considers”), bounded by good faith, but an extreme decision no reasonable director could consider to advance success may evidence bad faith. Near insolvency, directors must consider creditors’ interests (s 172(3)), and creditor interests may outweigh members’ interests once insolvency is unavoidable.

Key Term: Enlightened Shareholder Value
The approach that informs s 172, requiring directors to advance members’ benefit while considering stakeholder and long‑term factors.

Duty to Exercise Independent Judgment (s 173)

Directors must exercise their own independent judgment. Reliance on appropriate advice is permitted, but directors must make their own assessment and not surrender discretion except where acting in accordance with prior company agreements or constitutional authorisations (s 173(2)).

Duty to Exercise Reasonable Care, Skill, and Diligence (s 174)

A dual standard applies (s 174(2)):

Objective: that of a reasonably diligent person carrying out the functions of the director, with general knowledge, skill, and experience reasonably expected.
Subjective: the general knowledge, skill, and experience that the particular director actually has.

The higher standard prevails. Specialist directors (e.g., a finance or legal director) may be held to a higher standard commensurate with their specialist knowledge. Directors should remain informed about the company’s affairs, monitor risk, and implement appropriate systems of control.

Duty to Avoid Conflicts of Interest (s 175)

Directors must avoid situations where personal interests conflict, or may conflict, with the company’s interests, including exploiting company property, information, or opportunities. The duty applies even post‑resignation regarding opportunities/information acquired during office (s 175(2)). Authorisation by independent directors (in private companies, if permitted by articles) or by members can pre‑authorise or ratify specific conflicts (s 175(4)–(6); s 180).

Worked Example 1.1

Asha is a director of TechBuild Ltd. She learns through a board meeting that TechBuild Ltd plans to bid for a lucrative government contract. TechBuild Ltd decides not to proceed due to resource constraints. Asha resigns and immediately forms her own company, which successfully bids for the same contract using information gained while she was a director at TechBuild Ltd. Has Asha breached any duties?

Answer:
Yes. Asha has likely breached s 175 CA 2006. The conflict duty extends to opportunities and information obtained while in office, and resignation does not cleanse the duty. The company’s decision not to proceed is irrelevant; she exploited an opportunity belonging to the company.

Conflicts commonly arise in multiple directorships, management buyouts, and personal dealings with the company. Robust disclosure and, where appropriate, member approval can mitigate risk.

Duty Not to Accept Benefits from Third Parties (s 176)

Directors must not accept benefits (e.g., bribes, commissions, gifts) from third parties given because they are a director or because they do (or omit to do) something as a director. An exception applies if acceptance cannot reasonably be regarded as likely to give rise to a conflict. The Bribery Act 2010 may also be engaged. Authorisation for a breach of s 176 can only be given by shareholders (s 180(4)).

Duty to Declare Interest in Proposed or Existing Transactions (s 177 & s 182)

Directors must declare the nature and extent of any direct or indirect interest in a proposed transaction with the company to the other directors before the company enters into it (s 177). A similar duty exists under s 182 in relation to existing transactions; declarations must be made “as soon as is reasonably practicable.” Exceptions apply where the interest cannot reasonably be regarded as likely to give rise to a conflict or where other directors are already aware (or ought reasonably to be aware).

Failure to declare under s 182 is a criminal offence (s 183). In many private companies, MA 14 prevents an interested director participating in quorum or voting on decisions concerning the transaction unless disapplied by an ordinary resolution (MA 14(3)).

Key Term: Connected Person
Includes family members (spouse/civil partner, cohabiting partner, children/step‑children under 18, parents) and companies where the director/connected persons control >20% of voting rights (ss 252–254 CA 2006). This is relevant to duties and shareholder approval requirements.

Worked Example 1.2

Lena is a newly appointed finance director. She approves entry into a complex derivative contract without reading the terms or seeking advice, relying on prior practice in an unrelated business. The contract contains unusual termination fees that expose the company to substantial costs. Has Lena breached s 174?

Answer:
Likely yes. The dual objective/subjective test requires Lena to exercise reasonable care, skill, and diligence. As a finance director, a higher specialist standard applies. Failing to read/understand key contractual terms or seek appropriate advice falls below the required standard.

Worked Example 1.3

Sam sits on the boards of two companies that propose a related‑party supply agreement. Sam discloses his interest by general notice but participates in the board decision and is counted in the quorum. The company has unamended Model Articles. Is this compliant?

Answer:
No. Although disclosure may satisfy s 177, MA 14(1) prevents an interested director being counted for quorum or voting on decisions concerning a transaction in which they are interested unless disapplied by ordinary resolution (MA 14(3)).

Consequences of Breach and Relief from Liability

Remedies

Breaches of duties under ss 171–173 and 175–177 give rise to equitable remedies, including an account of profits, rescission, restoration of property, and injunctions. Breach of the duty of care (s 174) is actionable in damages (s 178). The company is the proper claimant. In practice, where the board will not pursue a claim, a member may consider a derivative action under Part 11 CA 2006.

Ratification (s 239)

Members may ratify conduct amounting to negligence, default, breach of duty, or breach of trust by ordinary resolution. The vote(s) of the director concerned (if a member) and any connected members do not count if their votes would be decisive. Ratification is ineffective for illegal acts and fraud on the minority.

Relief by Court (s 1157)

The court may relieve a director from liability for breach of duty if they acted honestly and reasonably and, having regard to all the circumstances, ought fairly to be excused. This is a discretionary, fact‑sensitive relief.

Worked Example 1.4

Falcon Ltd’s cash position deteriorates. The board continues trading for six months, taking on new creditors while pursuing a turnaround. Directors implement daily cash controls, cut non‑essential spending, monitor accounts, and seek professional advice. Liquidation follows. Are the directors exposed to wrongful trading?

Answer:
Liability for wrongful trading (s 214 IA 1986) may be avoided if the directors took “every step” to minimise potential loss to creditors. Evidence of rigorous controls, advice, and active mitigation can support a defence. If the court finds there was no reasonable prospect of avoiding insolvent liquidation and steps were inadequate, contribution orders may be made.

Removal and Disqualification

Directors can cease to hold office through various means.

Resignation or Retirement

Directors may resign at any time by giving notice (MA 18(f)) and may retire under the articles (e.g., rotation in public companies). Resignation does not absolve post‑resignation duties in respect of confidential information and corporate opportunities acquired during office (s 175(2)).

Removal by Shareholders (s 168)

Members have a statutory right to remove a director by ordinary resolution at a general meeting, notwithstanding any contractual term or article (s 168(1)).

Special notice (28 clear days) must be given of the intention to propose the resolution (ss 168(2), 312).
The director is entitled to make written representations and speak at the meeting (s 169).
Removal cannot be effected by written resolution (s 288(2)(a)).
Removal is without prejudice to any contractual rights (e.g., damages for wrongful/unfair dismissal, redundancy) (s 168(5)).
Directors are not obliged to include a removal resolution on the agenda; members may need to requisition a meeting under ss 303–305 if the board will not convene one.
Weighted voting clauses (Bushell v Faith) may frustrate removal by temporarily increasing the voting rights of a shareholder‑director on removal votes (subject to challenge if contrary to statute).

Key Term: Special Notice
At least 28 clear days’ notice of a resolution to remove a director (or auditor), given to the company so that it can notify members (ss 168–169, 312 CA 2006).

Worked Example 1.5

Members holding 6% of the voting shares requisition a general meeting to remove a director. The board does not call the meeting within 21 days. Can the members proceed?

Answer:
Yes. If requisitioning members representing >5% of paid‑up voting capital request a meeting (s 303), the board must call it within 21 days (s 304). If they fail to do so, the requisitionists (more than half of them) may call the meeting themselves (s 305), with reasonable expenses recoverable from the company (s 305(6)). Special notice is still required for the removal resolution.

Disqualification

The Company Directors Disqualification Act 1986 (CDDA 1986) empowers courts to disqualify individuals from acting as directors or being involved in company management for 2–15 years on grounds including:

Conviction of an indictable offence connected with company management (s 2).
Persistent default under companies legislation (s 3).
Fraud in winding up (s 4).
Wrongful or fraudulent trading (IA 1986 ss 213–214; CDDA s 10).
Unfitness to act as a director in connection with insolvent companies (s 6) (the most common ground).

A disqualified person must not act as a director or take part in company management without leave of the court. Breach is a criminal offence and may lead to personal liability for company debts (CDDA s 15). Courts may also make compensation orders requiring payment to creditors where conduct has caused loss.

Key Term: Wrongful Trading
Continuing to trade when directors knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, without taking every step to minimise potential loss to creditors (s 214 IA 1986).

Key Term: Fraudulent Trading
Carrying on business with intent to defraud creditors or for any fraudulent purpose (s 213 IA 1986). Civil liability arises under the Insolvency Act; criminal liability may follow under CA 2006 s 993.

Worked Example 1.6

A private company lends £60,000 to a director to fund relocation costs. What approvals are required?

Answer:
Loans to directors generally require member approval by ordinary resolution (s 197 CA 2006). Limited exceptions apply (e.g., expenditure up to £50,000 to enable a director to properly perform duties; minor transactions up to £10,000). A memorandum must be made available detailing the nature of the transaction, amount, purpose, and company liability for 15 days before the meeting and at the meeting, or circulated with a written resolution.

Worked Example 1.7

A company sells a vehicle to a director’s spouse for £25,000. The company’s net asset value is £200,000. Is shareholder approval needed?

Answer:
Yes. The transaction is a substantial property transaction under s 190 (non‑cash asset with substantial value) with a connected person. “Substantial” is satisfied where (i) the asset is worth >£100,000; or (ii) >£5,000 and >10% of net assets. Here, £25,000 exceeds £5,000 and >10% of net asset value (£20,000), so approval by ordinary resolution is required unless an exception applies.

Summary

Directors manage the company under broad powers conferred by the articles, but are constrained by statutory and fiduciary duties. The general duties in ss 171–177 shape how directors must exercise power: acting within constitutional limits and for proper purposes, advancing success (including creditor interests near insolvency), exercising independent judgment and competent oversight, avoiding unauthorised conflicts and third‑party benefits, and declaring interests in transactions. Certain director‑related transactions require member approval (service contracts exceeding two years, loans/quasi‑loans/credit transactions, substantial property transactions, and payments for loss of office). Remedies for breach include equitable relief and common law damages, with possible ratification by members and court relief where appropriate. Members retain ultimate control through the power to remove directors and direct the board by special resolution, tempered by procedural safeguards and potential contractual consequences. Insolvency law and the CDDA 1986 impose personal exposures for wrongful/fraudulent trading and unfitness, with criminal and civil consequences for disqualified directors who act.

Key Point Checklist

This article has covered the following key knowledge points:

Directors may be de jure, de facto, or shadow; many legal duties and liabilities apply to all three.
Appointment is governed by the articles (e.g., MA 17 and MA 19); Companies House filings and statutory registers must be updated.
Directors’ powers derive from the articles (e.g., MA 3) and may be directed by members via special resolution (MA 4); quorum and written decisions are governed by MAs.
Section 39 protects validity of acts from capacity challenges; s 40 protects good‑faith third parties dealing with the company.
General duties under ss 171–177 CA 2006 include acting within powers and for proper purposes, advancing success (including creditor interests near insolvency), exercising independent judgment and reasonable care, avoiding conflicts, not accepting third‑party benefits, and declaring interests.
MA 14 generally prevents an interested director from counting in quorum or voting on decisions concerning a transaction unless disapplied by ordinary resolution.
Specific member approvals are required for: long‑term service contracts (s 188), loans/quasi‑loans/credit transactions (ss 197–214), substantial property transactions (s 190), and payments for loss of office (ss 215–222).
Breaches can lead to equitable/common law remedies (s 178), shareholder ratification by ordinary resolution (s 239), and potential court relief (s 1157).
Members can remove directors by ordinary resolution at a general meeting with special notice (ss 168–169); written resolutions cannot be used; Bushell v Faith clauses may affect voting.
Directors may face personal exposures under IA 1986 (wrongful/fraudulent trading, misfeasance) and can be disqualified under CDDA 1986, with criminal/civil sanctions for breach of disqualification.

Key Terms and Concepts

Director
De Jure Director
De Facto Director
Shadow Director
Articles of Association
Board Resolution (BR)
Enlightened Shareholder Value
Connected Person
Persons with Significant Control (PSC)
Special Notice
Wrongful Trading
Fraudulent Trading

Corporate governance and compliance - Rights, duties, and po...