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Directors' Duties and Liabilities for SQE1

Part of our SQE1 Business Law and Practice guide → View the full SQE1 Business Law and Practice guide

12 Apr 2026

Understand the seven statutory duties imposed on directors under CA 2006, how they are applied, and remedies available for breach.

Directors' Duties and Liabilities for SQE1

Business Law and Practice > Directors' Duties and Liabilities

Directors' duties trips up more SQE1 candidates than almost any other topic in Business Law. Why? Because the statute (CA 2006 ss.171-177) looks straightforward on the surface—seven duties, each with a test—but the devil is in the application. Confuse section 175 with section 177, miss the dual test in section 174, or overlook a conflict that wasn't disclosed, and your answer collapses. This guide cuts through the traps and shows you exactly what examiners look for.

What are Directors' Duties in SQE1?

Directors' duties are legal obligations imposed on those who manage a company. The CA 2006 codified seven general duties that replace and clarify the common law position. Breach of duty may expose a director to personal liability, and the company may claim damages or other remedies.

SQE1 tests your ability to:

  • Identify which duty is breached
  • Apply the statutory test
  • Recognise relevant case law interpreting the duty
  • Identify available remedies

Key Principles for SQE1

  • Section 170 - General framework: Directors' duties are owed to the company (not individual shareholders), though breaches may be pursued through shareholder remedies like derivative claims. s.170(4) provides that the duties should be interpreted and applied in the same way as pre-2006 case law (so Regal (Hastings) v Gulliver and other landmark cases remain relevant for interpretation).

  • Section 171 - Act within powers: Directors must act in accordance with the company's constitution and only exercise powers for proper purposes. A director cannot exercise a power granted for one purpose (e.g., issuing shares for capital) for an unauthorised purpose (e.g., defeating a takeover bid).

  • Section 172 - Promote success of company: Directors must act in good faith to promote the success of the company. In doing so, they must consider: long-term consequences, employees' interests, business relationships, impact on community, reputation, and the need to act fairly between members. This codifies the enlightened shareholder value principle. It is a subjective test: what does the director believe promotes the company's success?

  • Section 173 - Exercise independent judgment: Directors must exercise independent judgment and not surrender discretion to others. However, this does not prevent the director from acting in accordance with an agreement, articles, or a properly taken shareholder decision (e.g., ordinary resolution passed at a general meeting).

  • Section 174 - Reasonable care, skill and diligence: Directors must exercise the care, skill and diligence that a reasonably diligent person would exercise in the same circumstances. This is a dual objective/subjective test:

  • Objective: competence expected of a reasonable director in that position

  • Subjective: the director's own knowledge and experience

A director with greater expertise is held to a higher standard. This duty is often breached in negligent decision-making scenarios.

  • Section 175 - Avoid conflicts of interest: Directors must avoid situations where they have (or may have) a conflict between their personal interest and the company's interest. A director cannot use company property, information, or opportunities for personal benefit (Regal (Hastings) v Gulliver principle - corporate opportunity diversion).

Authorisation: In a private company, a conflict under s.175 may be authorised by the board (excluding the conflicted director). In a public company, shareholder approval is typically required. Failure to obtain authorisation is a breach.

  • Section 176 - Not accept benefits from third parties: Directors must not accept benefits from third parties in connection with their office. A "benefit" is anything of value (cash, contracts, gifts, loans). This prevents bribery and corruption. Exception: benefits can be accepted with board authorisation.

  • Section 177 - Interest in proposed transactions: Directors must declare any interest in a proposed contract or arrangement with the company (e.g., a director personally contracting with the company). This is distinct from s.175. The declaration must be made to the board (s.182 for existing interests). Failure to declare is a breach.

  • Remedies for breach: The company may claim:

  • Damages - compensation for losses caused by the breach

  • Account of profits - director must return any profits made from the breach

  • Rescission - unwind a transaction if breached s.175 (e.g., resile from a contract where the director had a conflict)

  • Injunction - prevent anticipated breach

  • Director disqualification - under the Company Directors Disqualification Act 1986 for serious misconduct (particularly serious in insolvency scenarios where director conduct harms creditors)

Exam tip

When a scenario involves a director purchasing a business opportunity or contracting with the company, immediately ask: has there been disclosure (s.177) and is there a conflict requiring authorisation (s.175)? The duties operate independently—failing one doesn't excuse failing the other.

How This Appears in SQE1 Questions

For example, a question might describe a director who learns of a business opportunity while at a board meeting and then purchases the contract in her personal name before the company can. You'd apply section 175, identify the conflict of interest, and determine whether it was authorised and whether rescission is available.

SQE1 typically presents scenarios where:

  • A director has a conflict of interest (s.175) - was it authorised?
  • A director failed to declare an interest in a transaction (s.177) - was the declaration made?
  • A director exercised poor judgment (s.174) - does it meet the dual test?
  • A director diverted a corporate opportunity for personal gain (s.175) - was the opportunity "lost"?
  • A director was influenced by extraneous considerations (s.172) - did they promote the company's success?

This distinction is tested repeatedly in SQE1—get it wrong and the entire answer collapses. A critical trap: confusing s.175 (conflicts of interest) with s.177 (interest in proposed transactions). s.175 is about competing interests; s.177 is about declaring interest in a specific proposed contract.

Another trap: applying only the objective limb of s.174. The duty has both objective and subjective elements. Remember that company formation and constitution establish the framework within which directors' powers are exercised—check the articles first when determining whether a director has acted within powers under s.171.

Common Mistakes Students Make

  • Confusing s.175 with s.177. s.175 is about conflicts of interest and avoiding them; s.177 is about disclosing interest in proposed transactions. Both are distinct duties.
  • Applying only the objective limb of s.174. The reasonableness test is dual: objective standard AND the director's own knowledge. Forget the subjective limb and you'll get the answer wrong.
  • Forgetting duties are owed to the company, not shareholders. Individual shareholders usually cannot sue directly for breach. The company (or a shareholder via derivative claim under ss.260-264) can.
  • Overlooking s.170(4) relevance of pre-2006 case law. Decisions like Regal (Hastings), Guinness plc v Saunders, and Item Software v Fassihi remain key to interpreting the statutory duties.
  • Misunderstanding authorisation requirements. A conflict under s.175 can be authorised by the board in a private company (excluding the conflicted director). Without authorisation, it is a breach.

Quick Summary

  • Seven statutory duties in ss.171-177 owed to company (not individual shareholders); derivative claim allows shareholder enforcement
  • Section 174 (care, skill, diligence): dual objective/subjective test (reasonable director standard AND individual's own knowledge)
  • Section 175 (avoid conflicts): director cannot use corporate opportunity for personal benefit; authorisation required (private company: board; public: shareholder approval)
  • Section 177 (declare interest): distinct from s.175; applies to specific proposed transactions with company; must declare interest to board
  • Section 170(4): pre-2006 case law (Regal, Guinness plc v Saunders, Item Software v Fassihi) remains relevant for interpretation
  • Remedies: damages, account of profits, rescission, injunction, disqualification under CDDA 1986

Want to test this now? Try a few SQE1-style questions below before moving on.

Test Yourself

Test yourself

Quick check questions based on this article.

Question 1

Scenario

A private company limited by shares manufactures kitchen appliances. The company has two directors, a managing director and a finance director. The managing director also owns 60% of the issued shares. At a board meeting, the finance director proposes that the company enter into a contract to supply appliances to a restaurant chain at a substantial discount. The finance director does not disclose that her husband is the majority shareholder of the restaurant chain. The managing director is unaware of this connection. The company's articles of association are based on the model articles for private companies and have not been amended. The board votes in favour of the contract, with both directors voting to approve it. The company subsequently discovers the connection between the finance director and the restaurant chain. The appliances have already been delivered and the restaurant chain has paid in full at the discounted price. The company's net profit on the contract is lower than it would have been at full price, but the company has not suffered an overall loss.

Which of the following best describes the finance director's position?

Question 2

Scenario

A director of a private company limited by shares has been managing the company's affairs for five years. The company's principal activity is importing organic food products. The director recently made a decision to enter into a new supply agreement with a European distributor. Before entering the agreement, the director reviewed the distributor's financial statements, took references from two existing customers, and consulted the company's accountant about the financial implications of the contract. The director did not consult the other two directors before signing the agreement, although the articles do not require this for contracts below £100,000. The supply agreement is worth £75,000 per annum. Three months later, the distributor becomes insolvent and cannot fulfil the order. The company suffers a loss of £40,000. A shareholder alleges that the director breached the duty of care under s.174 CA 2006 by failing to detect the distributor's financial difficulties. The distributor's insolvency was caused by a fraud committed by its own finance director, which was not discoverable through standard due diligence.

Which of the following best describes the director's position in relation to the alleged breach of the duty of care?

Question 3

Scenario

A private company limited by shares has three directors. The company develops mobile applications. The managing director attends a technology conference in her capacity as director and learns about a new software licensing opportunity that could significantly benefit the company. Instead of presenting the opportunity to the board, the managing director forms a new company with her partner and acquires the software licence personally. She intends to develop the opportunity through her new company. The managing director resigns from the original company two weeks after acquiring the licence. The original company only discovers the opportunity six months later when the managing director's new company launches a competing product. The managing director argues that she resigned before exploiting the opportunity and that she was free to compete after leaving. The company's articles are the unamended model articles for private companies. The managing director's service contract does not contain a non-compete clause. The original company had sufficient resources to pursue the licence at the time.

Which of the following best describes the former managing director's legal position?

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