The duty to promote the success of the company

Q: How does this look in a real decision?

Illustration only. A company with three directors is deciding whether to move production to a cheaper contract manufacturer. The board pack shows annual savings, the notice period in the current supply contract and the likely redundancies. The minute records that the directors considered the long term effect on quality, consulted the operations manager about staff, discussed how to give the current supplier fair notice to protect the relationship, and noted that one director's brother works for the proposed new manufacturer, so that director declared the interest and did not vote. The decision is to proceed in six months rather than immediately, to allow a redeployment exercise. That record shows real engagement with several factors and a reasoned outcome, which is what section 172 asks for.

Section 172 of the Companies Act 2006 requires each director to 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 as a whole, while having regard to six listed factors such as employees, suppliers and the long term. In practice the duty is judged by how a decision was reached, so the board papers and minutes written at the time are the best evidence that a director actually complied.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

What does section 172 actually require of a director?

Section 172(1) sets a subjective test. The question is what the director considered, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. The explanatory notes to the Act describe this as the principle of “enlightened shareholder value”: members come first, but a director must look beyond the immediate financial result. In reaching a decision the director must have regard, among other things, to:

the likely consequences of the decision in the long term;
the interests of the company’s employees;
the need to foster business relationships with suppliers, customers and others;
the impact of the company’s operations on the community and the environment;
the desirability of maintaining a reputation for high standards of business conduct; and
the need to act fairly as between members of the company.

The list is not exhaustive. The explanatory notes say the decision as to what will promote success, and what success means, is for the director’s good faith judgment, so business choices on strategy and tactics are for the board rather than the courts. The duty is one of seven general duties; our overview of directors’ duties under the Companies Act explains how it fits with the others.

Is it enough to tick off the six factors?

No. The explanatory notes (paragraph 328) say that in having regard to the factors, the duty of reasonable care, skill and diligence in section 174 applies, and that it will not be sufficient to pay lip service to them. In many cases directors will need to take action to comply with this part of the duty.

The same paragraph sets a limit. The duty does not require more than good faith and reasonable care, and a director acting in good faith should not be held liable for a process failure that would not have affected the decision about which course best promotes the company’s success. The practical lesson is that the factors should be genuinely considered where they are relevant to the decision. A short, specific note that employees were consulted on a reorganisation is worth more than a paragraph that repeats all six factors for every routine item.

Section 172 also sits alongside section 173, which requires directors to exercise independent judgment. A majority shareholder can say what it wants, but each director must still reach their own view on whether the course proposed promotes the success of the company.

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

How does the duty change for charities, community companies and companies near insolvency?

Section 172(2) deals with companies whose purposes include purposes other than benefiting members. For those companies the reference to promoting success for the benefit of members is read as a reference to achieving those purposes. The explanatory notes give charitable companies and community interest companies as examples, and say it is for the director’s good faith judgment to decide what the purposes are and how far they replace the members’ benefit.

Section 172(3) makes the duty subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors. The explanatory notes say the duty to promote success is displaced when the company is insolvent, and point to section 214 of the Insolvency Act 1986, which lets a liquidator seek a contribution from directors who failed to minimise losses to creditors once they ought to have seen insolvent liquidation coming. When cash is tight, minutes should show the board looking at creditors’ position explicitly. Our guide to wrongful trading covers that stage in detail, and the board’s going concern assessment is often where the warning signs first show.

How should a board decision be recorded?

Section 248 requires every company to record minutes of all proceedings at directors’ meetings and keep them for at least ten years from the date of the meeting. Failure is an offence by every officer in default. Where a company uses the model articles for private companies, article 15 also requires the directors to ensure the company keeps a written record, for at least ten years, of every unanimous or majority decision taken by the directors. Under model article 8 a unanimous decision can be taken in writing without a meeting, and that written resolution then forms the record.

A minute that will stand up later usually covers the points in the table below.

Part of the minute	What it should show
The question	What the board was deciding and why it came up now.
Information considered	The papers, forecasts or advice the directors read, with dates.
Options	The realistic alternatives, including doing nothing.
Relevant factors	Which section 172 factors were engaged and what the directors concluded about each, for example the effect on staff or on a key supplier.
Interests	Any declarations of interest and how conflicted directors were handled.
Decision and reasons	The outcome and the main reasons, in the directors’ own words.

The interests line links to two separate duties: see our guides to directors’ conflicts of interest and declaring an interest in a transaction.

What if the company has only one director?

Under model article 7(2), where a company has only one director and its articles do not require more, the sole director may take decisions without following the articles’ rules on directors’ decision making. Section 172 still applies in full. A dated written note of significant decisions, with the reasons and the factors considered, gives the same protection a board minute would. GOV.UK guidance on paying dividends says to keep minutes of the directors’ meeting even if you are the only director, and the same habit works for other important decisions.

Which companies must publish a section 172 statement?

Section 414CZA requires the strategic report for a financial year to include a “section 172(1) statement” describing how the directors had regard to the factors in section 172(1)(a) to (f). It does not apply if the company qualifies as medium sized for that year, and small companies are exempt from preparing a strategic report at all under section 414B. The requirement was added by the Companies (Miscellaneous Reporting) Regulations 2018 for financial years beginning on or after 1 January 2019.

Under section 426B an unquoted company that must include the statement has to make it available free on a website that it maintains and that identifies it, as soon as reasonably practicable, and keep it there until the next year’s statement replaces it. Default is an offence. The published statement is only as credible as the decisions behind it, which is why groups that report usually build section 172 prompts into their board paper templates.

How does this look in a real decision?

Illustration only. A company with three directors is deciding whether to move production to a cheaper contract manufacturer. The board pack shows annual savings, the notice period in the current supply contract and the likely redundancies. The minute records that the directors considered the long term effect on quality, consulted the operations manager about staff, discussed how to give the current supplier fair notice to protect the relationship, and noted that one director’s brother works for the proposed new manufacturer, so that director declared the interest and did not vote. The decision is to proceed in six months rather than immediately, to allow a redeployment exercise. That record shows real engagement with several factors and a reasoned outcome, which is what section 172 asks for.

What mistakes do directors make with section 172?

Writing minutes weeks later, or reconstructing them when a dispute starts.
Recording only the outcome, with no sign of the information or reasons behind it.
Pasting the six factors into every minute regardless of relevance, which can suggest lip service.
Forgetting the duty to act fairly as between members, for example when issuing shares or setting dividends that affect shareholders differently. Our guides on allotting shares and paying dividends legally cover the separate formal rules.
Treating an instruction from a majority shareholder as a substitute for the director’s own judgment.
Carrying on with the usual approach after the company’s finances deteriorate, when creditors’ interests need to be weighed.

What happens if a director breaches the duty?

Section 178 provides that the consequences of breaching sections 171 to 177 are the same as if the corresponding common law rule or equitable principle applied, and the duties other than section 174 are enforceable in the same way as any other fiduciary duty owed to the company. The claim belongs to the company. Under section 239 the members can ratify a director’s breach of duty by resolution, but if the director is a member, their votes and those of connected members are disregarded. Good contemporaneous records are often what allows a board to show it acted in good faith, which is the heart of the section 172 test. Some directors also hold directors and officers liability insurance for defence costs.

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.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.