Directors' duties when a company takes on debt: what the law requires

The seven statutory duties in brief

The Companies Act 2006 codifies seven duties owed by directors to their company: to act within powers; to promote the success of the company; to exercise independent judgment; to exercise reasonable care, skill and diligence; to avoid conflicts of interest; not to accept benefits from third parties; and to declare interests in proposed transactions. These duties are owed to the company, not directly to individual shareholders or creditors, though those parties can have derivative rights in certain circumstances.

When considering a borrowing transaction, the most immediately relevant duties are the duty to promote success (is this debt genuinely in the company's interests?), the duty to exercise reasonable care (has the director understood the terms?), and the duty to declare interests (does any director stand to benefit from the lender or the transaction in a way that should be disclosed?).

Acting within powers and authorising borrowing

The company's articles of association typically set out the board's authority to borrow, sometimes subject to a monetary limit unless shareholders approve a higher figure. Directors should confirm before execution that the proposed borrowing falls within their delegated authority. If the articles set a limit — often expressed as a multiple of paid-up share capital or a fixed sum — board action alone is insufficient above that level, and a shareholder resolution may be required.

Loan agreements often require a certificate from the company confirming authority. Providing a false certificate is a serious matter that can expose the director personally and may unwind the transaction. Conduct a brief check of the articles and any shareholder agreements before signing off on the borrowing.

Conflicts of interest and connected lenders

Section 175 requires directors to avoid situations where their personal interests, or the interests of a connected person, conflict with the company's interests. This becomes live when the lender is also a shareholder, a related company, or someone with whom the director has a personal relationship. In such cases, the director must declare the interest at a board meeting and, in many cases, abstain from the vote on whether to proceed.

Even where a conflict is declared and authorised by the remaining directors, the terms of the transaction must still be on an arm's-length basis or be explicitly approved by shareholders. A borrowing at above-market rates from a connected lender, or with unusual security terms, is vulnerable to challenge as an unlawful transaction at the company's expense.

How duties shift when insolvency approaches

When a company is solvent, directors owe their duties to the company, which broadly means acting in shareholders' long-term interests. As the company approaches insolvency, the courts recognise that creditors become the primary economic stakeholders, and the duty to promote the company's success is interpreted as protecting their interests. A director who makes decisions that benefit shareholders at creditors' expense during this twilight period may face personal liability.

The Supreme Court confirmed this principle in BTI 2014 LLC v Sequana SA [2022]. The practical implication for borrowing decisions is that taking on additional debt when the company is already in distress — particularly to pay existing debts — requires careful analysis of who bears the risk and who benefits. Independent advice from an insolvency practitioner at this stage provides both protection and clarity.