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A director’s duties when the company takes on debt
When a company borrows, it is the directors who make the decision — and they make it as directors, not as private individuals. That distinction carries a set of legal duties. The Companies Act 2006 codifies the general duties a director owes to the company, and several of them bear directly on a borrowing decision: the duty to act within powers, to promote the success of the company, and to exercise reasonable care, skill and diligence. This piece sets out how those general duties apply when debt is on the table. It is general information, not legal advice; for a specific decision, take advice that looks at your company’s circumstances.
The general duties, in outline
The Companies Act 2006 sets out the general duties of directors. In broad terms a director must act within their powers; promote the success of the company for the benefit of its members as a whole; exercise independent judgement; exercise reasonable care, skill and diligence; avoid conflicts of interest; not accept benefits from third parties; and declare any interest in a proposed transaction. These duties are owed to the company itself. They apply to everyday decisions, and a decision to take on debt is squarely one of them.
Act within powers
A director must act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred. For borrowing, this means checking that the company actually has the power to borrow and to grant whatever the lender asks for, and that the directors have the authority to commit the company to it. Most modern companies have wide powers, but the articles can contain limits, and some decisions may need board approval recorded properly or, in some cases, shareholder involvement. Signing first and checking later is the wrong order.
Promote the success of the company
The duty to promote the success of the company asks a director to act in the way they consider, in good faith, most likely to promote the success of the company for the benefit of its members as a whole — while having regard to a list of wider factors such as the likely long-term consequences, the interests of employees, relationships with suppliers and customers, and the company’s reputation. Applied to borrowing, the question is not simply “can we get the money?” but “is taking on this debt, on these terms, the right thing for the company?” A short, well-matched facility that bridges a genuine gap can clearly serve the company’s success; borrowing that papers over a structural problem may not.
Exercise reasonable care, skill and diligence
This duty sets the standard expected of the decision-making itself. A director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with both the general knowledge and experience reasonably expected of a director, and the actual knowledge and experience that the particular director has. In practice that means doing the work: understanding what the company is signing, reading the cost in pounds rather than guessing at it, checking the company can afford the repayments out of realistic cashflow, and considering the alternatives. Our borrower’s due-diligence checklist and the finance calculators are there to support exactly that kind of careful work before a commitment is made.
When the company is in difficulty
The general duties are framed around the company’s members, but it is widely understood that, as a company approaches insolvency, directors must have proper regard to the interests of its creditors. The closer a company is to financial distress, the more weight that consideration carries. This is a point where general reading stops being enough: if a company is struggling to meet its debts, the duties around continuing to trade and taking on further obligations become genuinely consequential, and a director should take professional advice promptly rather than pressing on. Our piece on what happens if a company can’t repay covers the practical side of talking to a lender early.
How this connects to who the borrower is
These duties exist because the company is a separate legal person and the director acts on its behalf. When an incorporated business borrows from Credicorp, the agreement is with the company; a director signs in that capacity, not personally, and Credicorp takes no personal guarantee. That keeps the borrower-status clean: the company is the borrower, the director is the steward of the decision, and the lending sits outside the FCA consumer-credit regime under Article 60B of the FSMA Regulated Activities Order precisely because the borrower is a body corporate. Discharging your duties well — deciding within your powers, in good faith, with care — is how you make sure a company decision stays a company decision.
The honest summary
A borrowing decision is a directors’ decision, governed by the general duties in the Companies Act 2006. Act within the company’s powers; take the decision in good faith and for the company’s benefit, with the wider consequences in mind; and do the work a reasonably diligent director would do before committing. Where the company is in financial difficulty, the interests of creditors come sharply into view and advice should follow quickly. None of this is meant to make borrowing frightening — it is meant to make it considered. For any specific decision, take advice that looks at your own company.