In the corporate team, we're often asked about "Governance" (being the 'G' in ESG) and how an organisation can maintain "good" corporate governance practices. A solid leadership structure (i.e. a company's board of directors) is key to ensuring these responsible behaviours - as the board is best placed for influencing corporate governance matters (setting the tone at the top).
Directors are agents of the company and control the affairs and assets of the company. As a result of this relationship, a number of duties were established based on common law rules and equitable principals deriving from trust and agency law. These duties have since been codified in the Companies Act 2006 (the "Act") and are set out in sections 171 to 177 of the Act.
Directors are obliged to act in good faith and in a way they consider would be most likely to promote the success of the company for the benefit of its members as a whole. Where a director is appointed to multiple group companies (which is often the case), the director must act in a way that is in the best interests of the company they are making the decision on behalf of, meaning the interests of that company (and its shareholders) should not be sacrificed for those of another group company. No duty is owed by a director to the shareholders or creditors of other group companies, including the ultimate parent company. This could potentially cause issues in practice with the usual temptation, to treat the group as an individual entity.
That being said, whilst directors are not entitled to forgo the company's interests for another group company, the law does not require directors of a group to 'ignore' the interests of the wider group – particularly as a benefit to the wider group, could be a direct or indirect benefit to the company in question. For example, consider where an individual is appointed to multiple group companies and there are group-wide banking arrangements in place. If facilities are being increased in order to allow company A to carry out M&A activity and company B is required to grant further/increased security in order to obtain the new group facilities, the increased burden on company B may be justified as is in company B's interest to allow company B (and the wider group) to grow and continue to operate.
In practice, the most common scenario where group companies' interests may not align, is if one company is insolvent or at risk of insolvency. In cases of insolvency, directors are obliged to consider the interests of creditors and minimise their loss (and potentially prioritise the creditors' interest to that of the company's shareholders). In those cases, it may be difficult to justify a decision of the directors' by reference to a 'wider group benefit.' It may, however, be easier for the solvent group company to take certain actions that are in the interests of the group as a whole, for instance, they may be able to justify paying a supplier on behalf of a distressed group company (notwithstanding the immediate cost to the company) taking into account the potential impact that would occur if the relevant supplier was to cease trading with all group companies.
Whether in a group scenario or not, it is always advisable for directors to ensure that all of their decisions are formally documented (i.e. by way of board paper or minute). Such papers are often overlooked as an administrative burden but are crucial evidence to demonstrate that directors' duties have been considered by the board, indicating good corporate governance.
If you have any questions, or would like to discuss this article in further detail, please contact Gemma Gallagher or Katrina Hall.
