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Directors’ Duties, Conflicts & Loans - What You Need to Know

Gary Green
Gary Green
February 24, 2021

In the UK, a company director has a variety of duties they are obliged to meet including in the areas of potential conflicts and rules that dictate any loan that might be made.

This article provides basic guidance notes on the duties of a UK company director, company director conflicts of interest, and information on loans to UK company directors.

Duties

A primary duty of a director is the requirement to act within the constraints of the company constitution (commonly referred to as a duty to act within powers); rules created under the articles of association will dictate the trajectory of the company, and by extension, it will dictate the actions of the director. Decision-making powers that the director has will be contained in the articles of association, which can constrain options that a director might consider. If a company director overextends their powers in the UK, any decisions which relate to that over-reach of authority can be reversed by the board, and the director would be required to compensate the company for any financial losses they incur under the misdirected leadership.

The director is also responsible for promoting the company’s success, with a new requirement coming into play last year for any company with 250 employees or more to submit an explanation within their annual report as to how they have fulfilled the promotion obligation. There is a specific duty on the director to act in good faith, in a way that they believe would be most likely to benefit the shareholders of the company as a whole, which includes the employees, customers, communities, and suppliers.

In particular, the UK company director has a duty to consider the company’s success, and maintaining a good reputation for the company, in the short and long term. The environmental impact of the company’s business is something that a director has a duty consider within the terms of company promotion. A director has to maintain a broad perspective and consider all players within the company and the external business environment. The best interest of the company must be the key determinant to any board decision.

Directors are required to use independent judgement, after developing a personally informed view of the company’s activities. This allows the director to make informed decisions that are not bound by the demands or judgement or other experts or major shareholders. Exercising reasonable care, diligence, and skill, is key to the duties of a UK company director. There is a statutory duty for directors to disclose any direct or indirect interest in any existing transaction or any existing arrangement which is being proposed or arranged by the company.  Directors are also responsible for ensuring the company’s legal obligation of record-keeping is maintained, as there is an onus on the company to keep minutes of board meetings on record for 10 years.

Conflicts

Another legal obligation that a UK company director has is to avoid any conflict of interest that could affect their objectivity in their position over the company. If any conflicts of interest arise, the company director is obliged to inform the other company board members, and in some cases also to the shareholders. The purpose of this is to let a non-biased party decide how to objectively manage the conflict in order to maintain the integrity of the company through robust board decision making processes.

An example of such a conflict of interest would be if a director has a relationship with another business on a personal level, or with persons that are affected by the company’s activities. It might also be when a director considers taking financial advantage of a situation on a personal level, such as through information or property that belongs to the company. Gifts from third parties are also considered conflicts of interest where they might give rise to future advantage to any person; in such instances, the benefits or gifts must be disclosed by the director.

Loans

UK company directors are obliged to maintain a record of transactions between the company and the director, including amounts due from the director to the company (recorded as a debit) and amounts due from the company to the director (recorded as a credit). This includes private payments made by the company to any family member, friend, business partner, or person affiliated or associated with the director.

The director loan account must show that there was prior shareholder approval for any loan over £10,000. Since the director is normally also a controlling shareholder, this is not a legal issue but more of a formality. If the company has more than one director, and one director owes money to the company and one is owed money from the company, a written agreement can be made between those parties to offset those balances. If the loan is more than £10,000, a benefit in kind arises on the cash equivalent of the amount of interest payable at the official rate. Benefit in kind does not arise when the director pays interest on the loan at an interest rate recommended by HMRC, or where the loan is under £10,000.

There are disclosure requirements under the Companies Act 2006 section 413 relating to any advance or credit by the company to any director. The loan amounts granted over the year, the interest rate and total interest charged, the amounts repaid, whether it was written off, and any condition to the loan must be noted. Companies can write off loans given to directors, but they must be waived formally to avoid the liability remaining if the company only agreed not to collect on the outstanding portion of the loan.

If you have any questions about the issues raised in this article, we at Key Business Consultants can help. Get in touch with us today or call us directly on 02037 282 848.

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