Directors duties: a practical starting point

A company director's role involves more than signing accounts or lending a name to an incorporation. Directors must understand their responsibilities, make informed decisions and act within the company's rules. A small or family-owned company is not exempt from the basic duties. ^[1][2]

Know whose interests you are considering

Directors' duties are owed to the company. A director appointed by an investor or working alongside a controlling shareholder should not assume that the appointing person's wishes replace those duties. Understand the company's constitution and the purpose for which a power is being exercised. ^[1]

The practical question is whether the decision can be explained by reference to the company's situation, evidence and obligations. Record the important considerations rather than relying on a conclusion that everyone was comfortable with the proposal.

Use independent and informed judgement

Ask for the financial and operational information needed to decide. Challenge unexplained figures, unrealistic forecasts and missing contract terms. Delegating specialist work can be sensible, but directors should understand the advice and the decision they are being asked to approve.

The relevant standard of care includes the role and the director's own knowledge and experience. A person should not accept appointment on the assumption that another director will handle everything. ^[1]

Identify conflicts and benefits

Disclose relevant interests and follow the applicable approval process. A connection with a supplier, a competing business or a personal opportunity may affect the decision. The right response depends on the type of interest, the articles and the law. ^[1]

Disclosure alone should not be assumed to authorise every transaction or allow an interested director to vote. Check the procedure before the decision is made.

Maintain practical oversight

• Review cash flow, liabilities and significant commitments.
• Monitor accounts, tax and Companies House deadlines.
• Record important decisions and their supporting information.
• Check delegated authority and system access.
• Escalate unresolved risks instead of repeatedly postponing them.

Act promptly when finances deteriorate

Financial distress can change the legal analysis and the interests directors must consider. Obtain timely insolvency advice where the company may be unable to meet obligations. Do not assume a shareholder instruction makes a risky payment or new commitment appropriate.

Ask what information would change the decision

Before approving a significant commitment, identify the assumptions on which it depends. A forecast may assume prompt customer payment, a successful product launch or continued lender support. Ask what happens if those assumptions fail and whether the company can still meet its obligations. This makes the board discussion more useful than simply noting that a forecast was circulated.

Record material questions and the answers obtained. Directors do not need to reproduce every operational detail in minutes, but the record should explain why a significant decision was considered appropriate. If essential information is missing, identify who will obtain it and whether approval is conditional or deferred. Do not describe a decision as fully informed when the board deliberately left a critical question unanswered.

Distinguish advice from the board's judgement

An accountant, solicitor or operational specialist can help directors understand a proposal. Ask the adviser to explain the scope and limitations of the work. A review of tax consequences does not necessarily assess commercial affordability, and a contract review may not verify the supplier's ability to deliver. The board should know which questions remain its responsibility.

An investor-appointed director may receive strong instructions from the investor. They still need to consider their duties to the company and any conflict or confidentiality issues. Keep the company's decision process distinct from the investor's internal approval. Agreement by the investor does not automatically establish that the company board has reached a valid and appropriate decision.

Establish a response to financial warning signs

Monitor missed payments, declining cash headroom and repeated breaches of agreed terms. If the company may be unable to meet obligations, obtain timely specialist advice on the directors' position. Avoid waiting for a formal insolvency event before asking whether proposed payments or new commitments need a different assessment.

For example, a director considering repayment of a connected person's loan while ordinary suppliers remain unpaid should raise the financial and legal questions before authorisation. The appropriate analysis depends on the circumstances. A general statement that shareholders want the payment does not settle those questions or substitute for an informed board process.

Build oversight into normal management

Use a recurring pack containing cash, significant liabilities, commitments, disputes and filing status. Give directors time to review it and a route to request clarification. Keep the pack proportionate to the business, expanding it when complexity or risk increases rather than copying a large-company template without purpose.

Use Conflicts of interest in a private company to examine conflicts in more detail. Board governance support can help structure board information, authority and decision records around the company's actual needs.

For example, a board considering a large dividend while suppliers remain unpaid should investigate the company's financial and legal position before approving it. A director's contribution is to identify the unanswered questions and ensure they are resolved through the right process, not merely to sign the document prepared by someone else.