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Directors’ duties: who you owe them to, and where personal exposure begins

Most people accept a directorship without examining it, because somebody needed a name on the form or because the title read as recognition. What arrives with it is a set of legal obligations owed to a party most new directors do not have in mind: the company itself, rather than the people who put them there.

In England and Wales a company is a legal person in its own right, distinct from its shareholders, its founders and its funders. A director’s duties run to that person. The distinction is invisible while everyone around the table wants the same thing, and it becomes the entire question on the day they do not.

Nothing tests these duties while trading is comfortable. They are examined afterwards, by an insolvency practitioner, a buyer’s advisers, or a shareholder who has fallen out with the others. Each reads a period they did not live through, with the outcome already known and a reason to look closely.

Very little of what follows concerns dishonesty. Directors who end up personally exposed are usually people who worked hard, genuinely believed the company would recover, and made a sequence of decisions each of which looked defensible on the morning it was made.

You do not represent whoever appointed you

The most widely held misunderstanding about the role is that a director sits on a board on behalf of whoever nominated them: the investor, the family branch, the parent company. English company law takes a different view. A director must promote the success of the company for the benefit of its members as a whole, which is not the same as advancing the interests of the member who arranged their appointment.

In an ordinary week nobody notices, because what suits the investor and what suits the company are usually the same thing. They part at predictable moments: a funding round priced so that it dilutes the founders, a decision about whether to sell now or trade on, a company in the same group that wants supply on favourable terms. At those moments a nominee director discovers that instructions from the appointing shareholder are advice they are free to weigh, not a mandate they may follow.

There is a quieter version that almost never gets thought about. Information flows back to the appointing shareholder without anybody ever deciding that it should: board papers forwarded so the fund can update its own model, a call before the meeting so that nobody is surprised during it. This may well be permitted by the investment documents. Where it is not, a habit nobody chose has become a breach of confidence owed to the company, and it is visible in the correspondence long afterwards.

Whose interests matter changes before the company does

As a company’s solvency comes into real doubt, the people whose interests a director must consider begin to change. Shareholders recede, because their money is spent, and creditors move towards the front, because from that point onwards it is largely their money being risked. This is the shift that produces most personal liability in England and Wales, and it is also the one directors are least equipped to spot in their own company.

The difficulty is that nothing announces it. Directors expect a threshold to arrive with a date attached, and instead there is a gradual change in the numbers that everybody sees and nobody names. Solvency is not simply a question of whether the balance sheet shows a surplus: a company can look sound on paper and still be unable to pay what falls due. Founders routinely count the loan they fully intend to put in, or the invoice they are confident the customer will settle, as though the money were already there.

In practice the change shows in trading behaviour well before it appears in the management accounts. Supplier payments are stretched by deliberate decision rather than administrative drift. Deposits are taken earlier in the sales cycle than the business used to take them. Discounts are offered for immediate payment on terms nobody would have accepted while the bank balance was healthy. Directors read each of these as sharp cash management, and someone reviewing the same period afterwards may read them as evidence that the company already knew.

Duties attach to each director separately

Duties attach to each director individually. There is no collective version of them that a majority can discharge on everybody’s behalf. A director is required to exercise independent judgement, which does not prevent them taking advice or deferring to colleagues who know a subject better, but does require that they applied their own mind. Saying afterwards that the others wanted it explains how the decision was reached and answers nothing about whether this director should have gone along with it.

The common pattern is not a director arguing and losing, but a director who is uneasy, says nothing because the meeting is already difficult, and allows the minute to record a unanimous decision. That minute becomes the best evidence of what they thought, and it says they agreed. Dissent that exists only in someone’s memory, or in a message sent to one colleague afterwards, is a poor substitute for a position taken in the room.

Resignation is where this goes most badly wrong. Directors under pressure resign believing it draws a line, and it undoes nothing done while in office. It removes them from the room in which the record of the difficult period is being written, while leaving them squarely inside the period that will later be examined, and the timing of a resignation is itself something people ask about. Stepping off the register while continuing to run the business is worse again, because the analysis follows whoever is actually making the decisions rather than the entry at Companies House.

Where conflicts of interest actually arise

Directors expect a conflict of interest to resemble corruption, and so fail to recognise the ordinary arrangements that owner managed businesses in England and Wales are built out of: premises held in a director’s pension scheme and let to the company, services bought from a company owned by a spouse, a second directorship at a business selling to the same customers, and the director’s loan account running in either direction, which almost nobody thinks of as a transaction at all.

The objection is seldom to the transaction. Related dealings are lawful, common, and frequently the reason the business survived its early period. The exposure comes from the arrangement never having been declared to anyone able to consider it, never approved in the way the company’s own constitution requires, and never recorded while the terms were fresh. An arrangement everybody inside the business regarded as obviously sensible reads very differently once it is set out in a schedule for a reader whose task is to find related party dealings.

One conflict deserves separate mention because it is so seldom named as one. A director who has given a personal guarantee, or who has lent money into the company and stopped drawing a salary, now has a private financial interest in which creditor gets paid out of a limited amount of cash. Directors in that position often feel their sacrifice has earned them latitude. What it has actually done is put their own recovery in tension with the company’s, at exactly the point where the duties are tightening.

Exposure accumulates outside the boardroom

Formal board resolutions attract care, because they feel like the moments that count. Personal exposure accumulates elsewhere, in things nobody in the business would describe as a decision: accepting a customer deposit for work the company is no longer confident it can deliver, renewing a supply account on credit, letting the payroll run in the knowledge that the tax will be short, and signing off accounts on the same basis as last time because that is the basis they were signed on last time.

Tax arrears deserve their own line, because in small companies unpaid tax operates as the cheapest available credit facility. It requires no application, no covenant and no conversation, and it grows quietly while the directors attend to the creditors who telephone, without anybody treating it as the financing decision it is.

Personal exposure is also not only financial. Conduct is reviewed after a company fails, and the consequences reach beyond a contribution to the company’s assets to whether that person is fit to run a company at all. A director who intends to continue their career is risking something the balance sheet does not measure.

When a difficult period is not a solvency question

A difficult trading period is not automatically a solvency question, and treating every poor quarter as though it were is its own kind of damage. A loss making company with committed funding behind it, a seasonal business in its lean part of the cycle, or a company whose shareholder has confirmed support in terms that mean something, may be nowhere near the territory where the duties change. Directors who reach for advice at the first bad set of figures buy reassurance, and sometimes talk themselves into restructuring a business that only needed to be left alone.

Two responses are actively harmful and both are common. The first is improving the file after the event: a minute written later, describing deliberations that did not happen and a state of mind the numbers of the time do not support. A thin record of a decision honestly taken is a far better position than a full record that cannot be reconciled with the emails sitting alongside it. The second is resigning as a protective measure, which changes a worried director’s position far less than it changes how that worry looks.

What separates a company having a bad run from a company in the zone where creditors’ interests come first is a judgement about the realistic prospect of recovery. It is precisely the judgement a director is least placed to make about their own company, because they are the person who has lived with every number, knows the explanation for each of them, and has good reason to believe the next quarter is different. Confidence of that kind is what keeps businesses alive, and it is also why the assessment is better made by somebody who does not share it.

This guide is general information about how these matters usually run. It is not advice, and nothing becomes advice until terms are agreed in writing. Brandleys Legal Ltd delivers reserved legal activities alongside regulated partners.