HomeFWJ TakeawayConnected companies and directors’ duties

There are many directors’ duties for directors of a limited company. These are generally codified under either company or insolvency legislation, and have also evolved from common law and other corporate governance codes.

What are directors’ duties?

At all times, directors have a duty to exercise reasonable care, skill and diligence in their role.

When a director is a director of a healthy successful solvent company, then their duties are mainly to the company, and the company’s shareholders as a collective group. Directors do not owe duties to subsidiary companies or other associated companies as a rule.

When a director is a director of a company that is facing insolvency, their duties change from being to the company, to being to the creditors of the company as a whole.

In a solvent company, directors’ duties centre around promoting the success of the company. This means that the directors must, in good faith, always keep in mind the following (amongst others):-

  • the need for fair dealings in business relationships with suppliers and customers.
  • the rights and interests of the company’s employees.
  • the impact of the company on the wider environment and community.
  • the need to act fairly towards shareholders.

All directors’ fiduciary duties remain owing when the company is insolvent, but the predominant duty at that point is to act in the best interests of the company’s creditors.

Duty to connected companies

Whilst a director does not have specific fiduciary duties to connected companies, directors’ general duties to the company to exercise reasonable skill and care and diligence in their role may overlap with connecting companies from time to time.

For example, one of the director’s duties under legislation is to avoid conflicts of interest. However, this may occur if there is some conflict of interest between the company over which the director is a director, and a connected similar company where the director is also a director of the connected company. This issue is very common, and can arise if a director sits on the board of various companies within the same group.

How to resolve conflicts

It is possible if a conflict arises between group companies that one or more of the companies can authorise a resolution of the conflict of interest between the group companies, either by shareholder resolution or board approval. There may already be provisions specifically on resolution of conflicts contained within the various company’s articles of association.

Company Directors’ Disqualification Act

If a company enters an insolvency situation such as liquidation, then it is possible that a director may face a claim for disqualification as a director if the Insolvency Service decides that there is sufficient evidence of misconduct to take a claim them.

Depending on the misconduct found, proceedings can lead to a disqualification order being made against that director for between 2 and 15 years.

Where that director was also a director of other companies, then their behaviour in those companies may also be taken into account in disqualification proceedings. Evidence of misconduct in all collateral companies may be used to establish unfitness. The unfitness does not need to be the same in all companies.

It is clear that directors who are directors of more than one company have a particular duty to make sure that the fact that they are directors of more than one company does not prejudice any of the companies, or lead them to breach their fiduciary duties to the company and/or the creditors. The consequences for directors personally can be severe, as can the consequences to the company or companies involved.

At Francis Wilks & Jones we have many years of experience in advising directors of one or more companies in balancing their duties across companies. If you have concerns, our friendly team of experts are on hand to talk through any issues that may be concerning you as a director. Please call any member of our team for your consultation now. Alternatively email us with your enquiry and we will call you back at a time convenient for you.

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