Director liability for the directors' and strategic reports

Q: How might it work in practice?

Illustration only. A medium sized company's strategic report says the business has "no significant customer concentration". In fact one customer provides 45% of sales and has given notice to end its contract, which the managing director knew about but did not mention to the rest of the board. The company later raises a loan relying on the annual report, the customer leaves and the company suffers loss. The lender cannot sue the directors over the strategic report because of section 463(4). The company, or later a liquidator, may claim against the managing director under section 463(2) if it can show the statement was untrue and that he knew it was untrue or was reckless about it. The other directors, who had no knowledge and no reason to suspect the statement was wrong, are not liable under section 463 merely because they approved the report, though their general oversight could be examined under section 174. Separately, section 414D(2) could make any director who knew the report did not comply, and failed to take reasonable steps, guilty of an offence.

Q: What should directors do when approving narrative reports?

Challenge the drafts. Section 463 protects honest directors, but recklessness is enough for liability. Approving a report without reading it, or ignoring a known doubt, risks being treated as reckless. Match the narrative to the numbers. Statements about performance, borrowing and risks should be consistent with the accounts and the board's own papers. The auditor will report on inconsistencies anyway. Do not leave out awkward facts. A deliberate decision to omit a material fact the law requires is exactly what section 463(3)(b) catches. Keep the approval record. Board minutes showing the reports were reviewed and questions asked support the case that directors were neither knowing nor reckless. See our page on approving and signing company accounts.

Q: What mistakes do people make about section 463?

Assuming it covers the accounts. It applies to the narrative reports and the separate corporate governance statement only. Thinking it is a complete shield. It removes liability to outsiders relying on the reports and narrows liability to the company, but criminal and civil penalty liability, and liability to the company for knowing or reckless statements, remain. Treating small company reports as irrelevant. A small company need not prepare a strategic report (section 414A(2)), and a micro entity need not prepare a directors' report (section 415(1A)), but where a directors' report is prepared the safe harbour and the offence in section 419 apply to it. Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant's fees with Solar Protect. Read how our cover works or get a quote.

Section 463 of the Companies Act 2006 limits a director’s civil liability for the strategic report, directors’ report, directors’ remuneration report and any separate corporate governance statement. A director is liable only to the company, and only if they knew a statement was untrue or misleading or were reckless about it, or knew an omission was a dishonest concealment of a material fact. Nobody else who relied on the report can sue the director under the general law for it.

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Which reports does section 463 cover?

Section 463(1) applies to:

the strategic report;
the directors’ report;
the directors’ remuneration report; and
any separate corporate governance statement, meaning one not included in the directors’ report (section 472A).

It does not cover the financial statements themselves. The balance sheet, profit and loss account and notes are outside the safe harbour, so the ordinary rules on directors’ duties and on the approval of accounts apply to them. Our pages on the strategic report and what goes in a directors’ report explain which companies must prepare each report and what they contain.

When is a director liable to the company?

Under section 463(2), a director is liable to compensate the company for any loss it suffers as a result of an untrue or misleading statement in a covered report, or the omission from it of anything required to be included. Section 463(3) then narrows that liability. The director is liable only if:

they knew the statement to be untrue or misleading, or were reckless as to whether it was untrue or misleading; or
they knew the omission to be dishonest concealment of a material fact.

Two features stand out. First, carelessness is not enough. A director who honestly but negligently approved an inaccurate description of the business’s risks is not liable to the company under this section. Second, the test for omissions is narrower than the test for statements: recklessness is enough for a misleading statement, but an omission must be known to be a dishonest concealment of a material fact.

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Why can’t shareholders or lenders sue?

Section 463(4) says no person is subject to any liability to anyone other than the company resulting from reliance, by that person or another, on information in a covered report. Section 463(5) adds that this includes being entitled to any civil remedy or to rescind or repudiate an agreement.

So a bank that lent money, an investor who bought shares or a supplier who gave credit after reading an optimistic strategic report cannot bring a claim against the directors for negligent misstatement based on that report. Their route, if any, is through the company, or under a different legal basis such as a specific representation given to them directly outside the report.

For listed issuers there is a parallel regime in Schedule 10A to the Financial Services and Markets Act 2000. Paragraph 3 makes the issuer liable to compensate investors who acquire, hold or dispose of securities in reliance on published information, on a similar knowing or reckless test applied to persons discharging managerial responsibilities. Paragraph 7(2) says a person other than the issuer is not liable, other than to the issuer, for such loss.

What liability does section 463 leave in place?

Section 463(6) says the section does not affect liability for a civil penalty or for a criminal offence. The main offences sit in the sections on approval:

Report	Approval section	Offence
Strategic report	Section 414D	Every director who knew the report did not comply, or was reckless as to whether it complied, and failed to take reasonable steps to secure compliance or prevent approval
Directors’ report	Section 419	The same test in section 419(3)
Failure to prepare a directors’ report	Section 415(4)	Every director immediately before the end of the filing period who failed to take all reasonable steps to secure compliance
Failure to prepare a remuneration report (quoted companies)	Section 420(2)	The same reasonable steps test

Each of those offences carries a fine on conviction on indictment, or a fine not exceeding the statutory maximum on summary conviction. Section 463 also does nothing to protect a director from the separate duties in sections 171 to 177 when the director is running the business; it only addresses loss caused by statements and omissions in the reports.

How do the auditors fit in?

Where a company is audited, section 496 requires the auditor to state whether, in their opinion based on the audit work, the information in the strategic report and directors’ report is consistent with the accounts and the reports have been prepared in accordance with applicable legal requirements. The auditor must also say whether, in light of their knowledge of the company and its environment, they have identified material misstatements in those reports, and give an indication of their nature. That is a check, not a transfer of responsibility: the reports remain the directors’ reports, approved by the board under sections 414D and 419. Our page on reading the auditor’s report covers the wording to look for.

How might it work in practice?

Illustration only. A medium sized company’s strategic report says the business has “no significant customer concentration”. In fact one customer provides 45% of sales and has given notice to end its contract, which the managing director knew about but did not mention to the rest of the board. The company later raises a loan relying on the annual report, the customer leaves and the company suffers loss.

The lender cannot sue the directors over the strategic report because of section 463(4).
The company, or later a liquidator, may claim against the managing director under section 463(2) if it can show the statement was untrue and that he knew it was untrue or was reckless about it.
The other directors, who had no knowledge and no reason to suspect the statement was wrong, are not liable under section 463 merely because they approved the report, though their general oversight could be examined under section 174.
Separately, section 414D(2) could make any director who knew the report did not comply, and failed to take reasonable steps, guilty of an offence.

What should directors do when approving narrative reports?

Challenge the drafts. Section 463 protects honest directors, but recklessness is enough for liability. Approving a report without reading it, or ignoring a known doubt, risks being treated as reckless.
Match the narrative to the numbers. Statements about performance, borrowing and risks should be consistent with the accounts and the board’s own papers. The auditor will report on inconsistencies anyway.
Do not leave out awkward facts. A deliberate decision to omit a material fact the law requires is exactly what section 463(3)(b) catches.
Keep the approval record. Board minutes showing the reports were reviewed and questions asked support the case that directors were neither knowing nor reckless. See our page on approving and signing company accounts.

What mistakes do people make about section 463?

Assuming it covers the accounts. It applies to the narrative reports and the separate corporate governance statement only.
Thinking it is a complete shield. It removes liability to outsiders relying on the reports and narrows liability to the company, but criminal and civil penalty liability, and liability to the company for knowing or reckless statements, remain.
Treating small company reports as irrelevant. A small company need not prepare a strategic report (section 414A(2)), and a micro entity need not prepare a directors’ report (section 415(1A)), but where a directors’ report is prepared the safe harbour and the offence in section 419 apply to it.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.

Director liability for the directors’ and strategic reports