Directors' duties when borrowing — Guides

2 min read

Good faithBorrow for the company's benefit

Creditor interestsThey rise as trouble nears

Record itMinute the decision

Borrowing is a director's decision

Taking on debt is a formal act of the board, governed by your fiduciary duty to act in good faith to promote the success of the company. You must genuinely believe the borrowing serves the business — funding a real need, on terms it can meet — not your personal convenience. That belief should be evidenced, not assumed.

Check your authority first

Before signing, make sure you can. Your articles of association or a shareholders' agreement may cap borrowing or require shareholder consent above a threshold. Exceeding your authority can make the decision challengeable and expose you personally. A quick check now saves a serious problem later.

When creditors' interests come first

As a company approaches financial difficulty, your duty shifts: the interests of creditors move to the front. Borrowing more when the company is heading for insolvency, or taking on debt you know it can't repay, can amount to wrongful trading — and strip your limited liability. If money is tight, take advice before you borrow, not after.

Document the decision

Good governance is your best defence. Minute the borrowing decision, record why it's in the company's interest, and keep the affordability working you relied on. If the loan is ever questioned, a clear paper trail showing a reasoned, good-faith decision is what protects you. See how to prepare a board pack.

Borrow on the right terms

Part of acting in the company's interest is choosing sensible terms — matching the facility to the need, and avoiding structures that put the company or you at undue risk. A personal guarantee shifts risk onto you personally; Credicorp lends to the company with no personal guarantee, keeping the obligation where your duty says it belongs. Test affordability with the affordability calculator.

Frequently asked questions

Can I be personally liable for my company's debts?

Generally no — limited liability protects you. But that protection can fall away if you keep trading or borrowing when you knew the company couldn't avoid insolvency (wrongful trading), or if you've signed a personal guarantee. Acting in good faith and taking advice early is the safeguard.

Do I need shareholder approval to borrow?

Sometimes. Your articles or a shareholders' agreement may require it above a certain amount. Always check your authority before committing the company — borrowing beyond your powers can be challenged and can expose you personally.

Should I minute a borrowing decision?

Yes. Recording the decision, the reasons it serves the company, and the affordability assessment is good governance and your best protection if the loan is ever questioned. It shows you exercised your duty properly.