The personal exposure of directors of English subsidiaries

The duty runs to the subsidiary

The general duties of directors under English law are codified in Chapter 2 of Part 10 of the Companies Act 2006, sections 170 to 177. The one that governs group life is section 172: a director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard among other matters to the likely long-term consequences of a decision, the interests of employees, the need to foster business relationships with suppliers and customers, the impact of operations on the community and the environment, the desirability of maintaining a reputation for high standards of business conduct, and the need to act fairly as between members.

Read that in a group context and the tension is immediate. The company whose success the director must promote is the subsidiary. The members whose benefit is in view are the subsidiary's members, which will usually mean the parent, so group interest is not irrelevant. But it enters through the subsidiary's own interest, and where the two diverge, the duty attaches to the entity on whose board the director sits. Alongside that sits the duty to exercise independent judgment, which is the provision that makes a director who does no more than implement instructions from headquarters legally exposed, however commercially sensible obedience feels. Section 173(2) recognises two situations in which the duty is not infringed: acting under an agreement duly entered into by the company that restricts its directors' future discretion, and acting in a way its constitution authorises. A properly adopted group framework or reserved-matters regime can sit there; the routine execution of whatever headquarters asks does not.

Two practical consequences flow. First, a subsidiary board asked to approve a dividend, an upstream loan, a guarantee of group debt or the transfer of an asset to an affiliate has to consider whether that step is in the subsidiary's interest and be able to show that it did. Second, the answer can legitimately be yes even for a transaction that primarily benefits the group, because a subsidiary usually derives real advantage from group membership, funding, systems, brand and procurement. The usual failure is the absence of any evidence that a decision was taken. The minutes a company must keep under section 248 of the Companies Act 2006 are what a court reads first, and section 249 gives authenticated minutes evidential weight.

When creditors' interests enter, and what the Supreme Court settled

Section 172 itself flags the complication: the duty has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors. The scope of that rule was the question in BTI 2014 LLC v Sequana SA, decided by the Supreme Court on 5 October 2022 and reported as [2022] UKSC 25. The subsidiary's directors had paid a dividend of EUR 135 million to the parent at a time when the company was solvent on both a balance-sheet and a cash-flow basis but carried long-term pollution-related contingent liabilities of uncertain amount; the claimant, an assignee of the company's claims, contended that the distribution had left too little in the company to meet them. Insolvency was neither imminent nor even probable when the dividend was paid, although the company entered insolvent administration almost ten years later. The creditor-duty claim failed at every level, and the Supreme Court unanimously dismissed the appeal.

The appeal failed because the Court rejected the argument that the duty to have regard to creditors' interests is triggered whenever there is a real but not remote risk of insolvency at some future point. On the majority's formulation, the duty engages where the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable (paragraphs 203 and 231 of the judgment); Lord Reed and Lady Arden agreed with that trigger but left open whether the directors' knowledge, actual or constructive, is an essential element. Lord Reed's formulation also covers a transaction that would itself place the company in one of those positions, and the judgment's treatment of dividends points the same way: directors of a company that cannot pay its debts as they fall due cannot properly distribute.

The practical significance for a subsidiary director is that the test looks at the company's actual position and at what the directors know or ought to know is probable, including the effect of the proposed transaction itself, and does not reach every distant risk; a distribution or a guarantee is exactly the kind of transaction that should prompt the solvency question before it is approved.

Crossing the threshold changes the decision as well as the paperwork. Once creditors' interests are engaged the directors must weigh them against the members' and the weight increases as the position worsens; where insolvent liquidation or administration is inevitable the members' interests cease to carry weight and the company's interests are treated as those of its creditors as a whole (paragraphs 11 and 81). An upstream dividend or guarantee that is unremarkable for a solvent subsidiary may then be one the board cannot properly approve at all.

In practice, before approving upstream value transfers, the board should look at the subsidiary's actual solvency position, on both a balance-sheet and a cash-flow view, take the numbers from management with a date on them, consider forecasts and known and contingent liabilities including those that are difficult to quantify, and record what it looked at. Where the position is uncertain, the board should take advice and not fall back on the health of the group, which is not the relevant company.

Shadow directorship, and the limits of the parent's protection

The mirror risk sits with whoever is sending the instructions. Under section 251, a shadow director is a person in accordance with whose directions or instructions the directors of the company are accustomed to act. A person is not a shadow director by reason only that the directors act on advice given by that person in a professional capacity, or in accordance with instructions given in the exercise of a statutory function, or on guidance given as a Minister of the Crown.

There is a group carve-out, and it is narrower than it is usually described. Section 251(3) provides that a body corporate is not to be regarded as a shadow director of its subsidiary companies for the purposes of Chapter 2 on general duties, Chapter 4 on transactions requiring members' approval, and Chapter 6 on contracts with a sole member who is also a director, by reason only that the subsidiary's directors are accustomed to act on its directions. That is a defined protection for the corporate parent in respect of specified Chapters. It is not a general immunity, it does not extend to the individuals at the parent who give the instructions, and insolvency legislation contains its own definitions and its own claims, which require separate analysis.

The operational lesson concerns the way instructions travel. Groups are entitled to give them. What creates the risk is a pattern in which a named individual at headquarters routinely directs the subsidiary board and the board routinely complies without deliberation, evidenced by minutes that record approval and nothing else. The safer pattern is a documented group framework, reserved matters that require parent consent, clear delegated authorities, and subsidiary minutes that show the board considered the company's own interest before agreeing. Deliberation does not, on its own, take the instruction-giver outside section 251. In Secretary of State for Trade and Industry v Deverell, applied in Instant Access Properties v Rosser, the Court of Appeal's view was that a board which surrenders its discretion is a sufficient case but not a necessary one; the question is whether the directors are accustomed to act in accordance with the directions, assessed objectively on all the evidence. A framework under which the board deliberates and sometimes declines is evidence against that pattern, and no safe harbour.

What the appointment package should contain

Anyone taking a subsidiary directorship, and any group asking someone to take one, should treat it as an appointment with terms, and the form as the last step. Six things belong in place before the appointment takes effect, and for a UK subsidiary the director's own Companies House identity verification comes first, on the timetable in our key dates.

1. A letter of appointment. Scope of the role, expected time commitment, meeting cadence, decision-making authority and reporting lines, so that the individual can show what they were engaged to do.
2. An information right. A director cannot discharge the duties without management accounts, cash-flow information and notice of material developments. Where the group controls the flow, the entitlement should be written down, and a director who cannot obtain information should record having asked.
3. An indemnity from the company or the parent. Drafted within the limits English law permits on indemnifying directors, which are technical and should be checked against the current provisions.
4. Directors' and officers' insurance that covers the seat. Confirm that the policy extends to subsidiary directorships in the relevant jurisdiction, to the individual as well as to the group, and that it survives the individual's departure for claims relating to their period in office.
5. A conflicts protocol. The individual is likely to hold a group role as well. How conflicts between the subsidiary's interest and the group's are identified, declared and handled, including when the director should abstain, needs to be agreed before the first live conflict arises.
6. An exit route. Resignation mechanics, what happens to the indemnity and insurance on resignation, and, in jurisdictions with a residency requirement, who replaces the seat. A director who resigns without a successor may leave the company in breach of a requirement such as the Irish EEA-resident director rule discussed in our note on holding company structures.

Other jurisdictions differ

The English framework above is one model, and the temptation in group governance is to build a single policy and apply it everywhere. That works for process and fails for liability, because the personal exposure attached to a directorship varies considerably.

In Switzerland, directors' duties of care and loyalty and the liability of members of the board are governed by the Code of Obligations, and Swiss law also imposes specific duties on the board where capital is lost or the company is over-indebted, with a body of practice around when the board must act and what it must do.

In Germany, the managing directors of a GmbH must apply the care of a prudent businessperson and are jointly liable to the company for damage from a breach (section 43 of the GmbH Act); payments to shareholders out of assets needed to maintain the share capital are prohibited (section 30), and where recovery is needed to satisfy creditors the managing directors are not excused by having acted on a shareholders' resolution (section 43(3)), which is the group instruction problem written into the statute; once the company is illiquid or over-indebted they must file for insolvency without culpable delay, at the latest three weeks after illiquidity and six weeks after over-indebtedness (section 15a of the Insolvency Code), and may make no further payments beyond those consistent with the care of a prudent and conscientious manager (section 15b).

In both, and in a number of other civil law jurisdictions, exposure can extend beyond company law into unpaid taxes and social security contributions, a category of personal risk that directors from common law backgrounds may not expect. It is not liability without fault: in Germany the legal representatives must see that the company's taxes are paid from the funds they manage (section 34 of the Fiscal Code) and are personally liable where taxes are not assessed or paid, or not on time, because of their intentional or grossly negligent breach of those duties (section 69), and withholding employees' social security contributions from the collecting agency is a criminal offence for which intent is an element (section 266a of the Criminal Code); in Switzerland board members and managers answer subsidiarily for the damage an employer causes the old-age insurance scheme by intentional or grossly negligent breach of its rules (Article 52 of the AHVG); but the standards are strict, the amount can be the company's whole arrears, and the defence turns on what the director did when the money ran short.

None of that is analysed here, and it should not be inferred from the English position. Where a group appoints someone to a board in a jurisdiction where it has no other presence, local advice on the personal exposure of that seat is a small cost against the risk it addresses.

For group general counsel, the subsidiary board is where the group's governance is tested, and it is usually the least documented layer in the structure. Fixing it costs little. It requires a template appointment pack, a minute style that shows deliberation, an information flow that reaches the people who owe the duties, and a policy on upstream transactions that asks the solvency question before the transfer.

What this means for you

• The duty is owed to the subsidiary. Group interest enters through the subsidiary's own interest, and the duty to exercise independent judgment means implementing instructions without deliberation is the exposure, unless the board acts under an agreement or constitutional provision of the kind section 173(2) recognises.
• Ask the solvency question before upstream value moves. After Sequana the creditor duty engages, on the majority's formulation, where the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that insolvent liquidation or administration is probable; a transaction that would itself put the company there calls for the same analysis before it is approved.
• Minutes are the evidence. A decision that primarily benefits the group can be perfectly proper. The minutes the company must keep under section 248 are what a court reads first, and section 249 gives authenticated minutes evidential weight; they cannot cure a decision that was wrong on its merits, and a thin minute can be supplemented by other evidence, but a minute that records approval with no sign that the company's own interest was considered is the worst starting point.
• The parent's shadow-director carve-out is limited. Section 251(3) covers a body corporate for specified Chapters only. It does not protect the individuals who give the instructions, and insolvency law runs its own analysis.
• Agree the appointment documents before accepting the role. Letter of appointment, information rights, indemnity, confirmed D&O cover, conflicts protocol and an exit route, checked against local exposure in the relevant jurisdiction.

Isak Legal advises groups, boards and individual directors on cross-border governance, subsidiary board arrangements and the documentation that supports them, working with local counsel where personal liability is governed by another jurisdiction's law. See our Corporate page, or get in touch.

This client update is provided for general information only, reflects the position as at 26 September 2026 and does not constitute legal advice or create a lawyer-client relationship. It addresses English law, taken from sections 172, 173, 248, 249 and 251 of the Companies Act 2006 in the consolidated text on legislation.gov.uk, from BTI 2014 LLC v Sequana SA [2022] UKSC 25 and from Instant Access Properties Ltd v Rosser [2018] EWHC 756 (Ch) quoting Secretary of State for Trade and Industry v Deverell [2001] Ch 340; the permitted scope of indemnities and insurance for directors, and the insolvency-law claims referred to, are governed by provisions not set out here and require specific advice. Swiss, German and other non-English positions are noted only to indicate that they differ and require local advice; the German and Swiss provisions cited are the current consolidated texts on gesetze-im-internet.de and Fedlex. Directors' personal tax and social security exposure is otherwise outside the scope of this note. For advice on a specific matter, please contact us.