Subsidiary governance is the system through which a group oversees and supports its subsidiary companies while enabling each company’s directors to fulfil their responsibilities. A useful framework identifies who makes decisions, what information they need, which approvals apply and how concerns reach the people able to act.
Consider a request from group treasury to move cash out of a subsidiary. The group may have a sound commercial reason. The subsidiary’s directors still need to understand the transaction, its effect on their company and the authority under which it will proceed. Group approval alone does not replace that assessment.
This guide focuses on UK-incorporated commercial subsidiaries, particularly private companies. Overseas companies require local legal assessment, while regulated businesses and companies with minority shareholders may need additional safeguards. The practical framework below is a suggested starting point to adapt to the group’s circumstances.
What remains the subsidiary directors’ responsibility?
A subsidiary is a separate legal entity within the group.https://www.cgi.org.uk/resources/blogs/2024/what-is-subsidiary-governance-an-introduction-to-subsidiary-governance-frameworks/ Its directors’ general duties are owed to that company. Directors’ general duties under the Companies Act 2006 (CA 2006) include acting within powers, promoting the company’s success and exercising independent judgement and reasonable care, skill and diligence. Sections 170–174 set out these duties.
For an ordinary commercial company, directors must act in good faith in the way they consider most likely to promote its success for members as a whole. In a company limited by shares, those members are the shareholders. Directors must have regard to statutory factors such as employees and business relationships. Section 172 (CA 2006).
Group strategy is relevant to that judgement. A subsidiary may benefit from shared funding, customers or services. The useful question is how the proposal serves this company, including its position within the group, and what risks it accepts in return. Give the subsidiary’s board a written assessment of the proposal’s expected benefits and risks for that company.
Independent judgement allows directors to take advice. The company’s constitution includes its articles of association: the rules governing how it is run. Under section 173, the independent-judgement duty is not infringed by following an agreement properly entered into by the company that restricts the directors’ future discretion. Nor is it infringed by action authorised by the company’s constitution. Parent nomination alone does not turn a directorship into an instruction to follow every group request. Section 173 and Companies House guidance explain the distinction.
Identify interests arising from overlapping group roles before a decision. Work out the applicable disclosure, authorisation and participation arrangements with appropriate advice, rather than assuming that using the same directors across the group resolves the issue. Sections 175 and 177 distinguish conflicts of interest from interests in proposed transactions with the company.
Financial distress needs particular attention. In its 5 October 2022 judgment in BTI 2014 LLC v Sequana SA, the UK Supreme Court confirmed that, in relevant circumstances, the company’s interests include those of its creditors. This remains a duty owed to the company. The judgment does not treat every risk of future insolvency as sufficient to trigger that rule. Seek advice promptly where the company’s financial position makes a proposed transfer or commitment questionable. Supreme Court judgment, paragraphs 11–14.
How do you build a subsidiary governance framework?
Start with the entities and decisions the group needs to manage. Establish each company’s purpose and exposure, map the approval routes, equip its directors, and connect records to reporting and escalation. The five steps below are suggested working practices to adapt to the group.
1. Establish what each entity is for
Create an entity map that connects the ownership chart to the business. For each company, identify:
- its purpose, jurisdiction, ownership and directors;
- its activities, employees and important assets or contracts;
- its financing, guarantees and dependence on other group companies;
- its regulatory status and applicable reporting obligations;
- the person responsible for keeping its information current.
Record where the information came from and when it was checked. Resolve discrepancies between legal records, finance systems and the organisation chart before using the map to allocate authority.
The resulting register should let someone answer a business question. If a key customer contract is moving, which company is currently party to it, who will take it on and which boards or authorised decision-makers need to be involved?
2. Match oversight to the entity’s exposure
Use a documented assessment to decide how much board attention and support each subsidiary needs. Consider regulated activity, employees, financing exposure, critical assets, external stakeholders and the pace of change. Revenue alone is an incomplete basis for that judgement.
For example, a hypothetical company with little revenue might hold intellectual property essential to the group or guarantee borrowing elsewhere. Another might employ a large workforce while recording limited external sales. Both deserve attention for reasons a turnover ranking could miss.
Set proportionate meeting and reporting arrangements, with additional review when circumstances change. Give a recent acquisition, refinancing or major operational change a clear route into that reassessment. The Chartered Governance Institute UK & Ireland’s (CGI) subsidiary governance guidance also emphasises adapting the framework to local circumstances and reviewing boards after significant events.
3. Separate consent, decision and execution
For important recurring transactions, distinguish these questions:
| Question | What to establish |
| Does the group support the proposal? | Which parent, shareholder or group approval is required, and under which document? |
| Can this subsidiary proceed? | Which subsidiary body or authorised person decides, with what information and conditions? |
| Who can implement it? | Who has authority to sign, instruct payment or complete the relevant action? |
| What happens if the terms change? | Who checks whether existing authority still covers the revised proposal? |
Map these arrangements against the articles, relevant agreements, board decisions and delegated authorities. A reserved-matters list sets out decisions kept for a specified approving body; identify whose approval each item requires. Check the legal effect of the documents, rather than treating a group policy as sufficient authority on its own.
This need not send every routine purchase to a board. The aim is to give people usable authority within agreed limits and a clear route for exceptions. Test the map using an actual transaction, including the point at which funds or commitments become irreversible.
4. Give directors the information and support to decide
Review who sits on each board as well as what they receive. Match the board’s skills and knowledge to the subsidiary’s business and risks, agree who leads its work, and plan for departures or absences. CGI recommends reviewing board composition and effectiveness.
Induction should explain the subsidiary’s business, financial position, obligations and place in the group. Include its principal dependencies: for example, whether cash, systems, customers or staff are supplied through another entity.
For each recurring decision, agree what information the directors need and who provides it. A consolidated group report may need a company-specific supplement showing the exposure relevant to the subsidiary. Give directors access to finance, legal and operational colleagues who can answer questions about that exposure.
Assess capacity as well as knowledge. A person appointed to several subsidiary boards needs enough time to understand the decisions at each. Include a route to further advice when the available information or overlapping roles make a decision difficult.
5. Connect records, reporting and escalation
Allocate responsibility for corporate records, filings, appointments, reporting and board support. Make each deadline somebody’s task, with cover when the usual person is away. Keep constitutional documents and current authorities accessible to the people using them.
Include applicable Companies House identity-verification requirements in appointment and filing checks. As at 24 September 2026, its guidance requires directors with several company appointments to provide their personal code for each company through the relevant filing. Verification and filing obligations depend on the role and when it began; check the current Companies House requirements.
Agree which matters need prompt escalation: a potential funding shortfall, material control failure, regulatory concern, proposed guarantee or disagreement about a group’s instruction. Identify the recipient and what happens if that person is unavailable or has a conflicting role.
Record the substance of significant decisions: the proposal, evidence considered, material questions, reasons, conditions and follow-up. A record that says only “group approval received” does little to explain the subsidiary’s own consideration.
How should a subsidiary assess an intercompany loan?
Assess the loan’s purpose, effect on the subsidiary’s cash, repayment prospects and authority before approving it. The following hypothetical example shows why group consent needs to be supported by information about the lending company.
Suppose a parent asks its wholly owned UK subsidiary to lend it £2 million. The subsidiary has £5 million of unrestricted cash and £3.8 million of unavoidable cash payments due over the next 30 days. For this hypothetical calculation, assume no other cash receipts, available borrowing or loan repayments during that period.
| Simplified cash calculation | Amount |
| Opening unrestricted cash | £5.0m |
| Proposed loan to parent | (£2.0m) |
| Cash remaining after loan | £3.0m |
| Payments due within 30 days | (£3.8m) |
| Projected cash balance after payments | (£0.8m) |
This is a deliberately simplified illustration, not a statutory insolvency test or a complete cash-flow forecast. It excludes interest and tax effects of the proposed loan, other assets and liabilities, and longer-term cash flows. The inputs are invented, not client data.
The parent would receive £2 million, while the subsidiary would have a £0.8 million funding gap on these assumptions. The transfer itself creates no additional cash for the group. A general assurance that the group will help is something to investigate: who can provide support, on what terms and when can it actually be accessed?
The directors should also consider the reason for the loan, the benefit and risk to the subsidiary, repayment prospects, relevant conflicts and the required approvals. Finance should substantiate the cash position; appropriate advisers should assess the legal and tax issues.
The outcome is not predetermined. The proposal might be reduced, rescheduled, supported differently or declined. The governance framework should ensure that the shortfall reaches the decision-makers before money moves, and that any conditions of approval reach the people instructing payment.
Do the Wates Principles apply to subsidiaries?
A qualifying subsidiary must report on its governance arrangements, but it does not have to use Wates. The Wates Corporate Governance Principles for Large Private Companies, published by the Financial Reporting Council (FRC), are a voluntary framework. A company adopting them follows an “apply and explain” approach, describing how it applies the Principles in its own circumstances. FRC Wates Principles, “How to report”.
For the relevant UK corporate governance reporting requirement, the headline thresholds are more than 2,000 employees, or both turnover above £200 million and a balance sheet total above £2 billion. Employees are measured as an annual average using monthly totals. Balance sheet total means the total assets shown in the company’s balance sheet. Adjust the turnover threshold proportionately if the financial year is not 12 months. Reporting regulations, Schedule 7, paragraphs 23–24.
Check exemptions and the rules for moving above or below the thresholds over successive years. Exemptions include charitable companies, community interest companies and companies already required to provide a corporate governance statement under the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR 7.2). The thresholds use each company’s worldwide figures, assessed individually. A parent’s report does not automatically discharge a qualifying subsidiary’s obligation. Government FAQs, sections B and E.
In-scope companies report which code they applied, how they applied it and any departures with reasons. If no code was used, explain why and describe the governance arrangements. Reporting regulations, paragraph 26. Include the statement in the directors’ report, or the strategic report using the permitted flexibility. An in-scope private company must also make it freely accessible on a website maintained by or on its behalf that identifies the company. Paragraph 27 sets out the website requirements.
These are the corporate governance statement tests; assess other reporting obligations separately.
If Wates is adopted, use it to explain the relationship between the group and the subsidiary. Where the parent sets a policy, describe how it operates in this company and what its directors do. The FRC’s December 2025 reporting insights encourage reporting about board actions and decisions. An account of how a financing proposal was questioned and changed can be more informative than an unsupported statement that governance is effective.
How can you test whether the framework works?
Choose a recent significant decision and review how it was proposed, approved and carried out. Check who acted, what evidence supported the decision and whether the agreed conditions were met. Use the following checklist, supporting each answer with a document or other evidence:
- Entity: Does the entity record explain its purpose, ownership and exposure, and show who checked it?
- Directors: Can the directors explain their responsibilities and obtain the advice they need?
- Authority: Can you trace group consent, the subsidiary decision and execution back to the documents authorising them?
- Information: Does the decision paper address this company’s position, including dependencies on the group?
- Conflicts: Does the record show how relevant interests and participation were addressed?
- Conditions: Can the person implementing the decision identify any limits and outstanding conditions?
- Reporting: Is there a documented assessment of this entity’s obligations and the evidence needed for its disclosures?
- Follow-through: Do records identify action owners, deadlines and an escalation contact, including cover?
For each gap, record the consequence, corrective action, owner and review date. Prioritise missing authority, information or funding evidence that could affect an imminent decision. Use the findings to update the framework and brief the people who operate it; a revised policy is only part of the correction.
Frequently asked questions about subsidiary governance
These questions address two practical choices: board appointments and the use of group policies.
Does every subsidiary need an independent non-executive director?
Wates does not require every company to have an independent non-executive director, meaning a board member independent of management who does not run daily operations. Check the subsidiary’s own legal, regulatory and constitutional requirements, and decide how its board will obtain effective challenge. FRC Reporting Insights, page 7.
Can a subsidiary rely on group governance policies?
A subsidiary can use group policies, but its directors still need to understand how those policies operate in their company. If the subsidiary reports using Wates, explain the relationship with the parent and the subsidiary board’s own responsibilities. FRC Wates Principles, page 9.
When would outside support help?
An unclear framework needs decisions about authority and accountability. A well-designed framework with overdue work may need additional capacity. A difficult transaction may need specialist legal or financial advice. Identify the problem before choosing the support.
Beyond Governance’s subsidiary governance support covers ongoing maintenance, audits and entity reviews, with ongoing or project-based support through CoSec-On-Demand. To discuss support, contact BG with the entity list, the current approval arrangements and one recent decision that was difficult to complete.
