A legal claim calling for the law to be changed to force company directors to start taking creditors into account at the first risk of insolvency has been dismissed by the UK’s Supreme Court.
A recent Supreme Court case, BTI 2014 LLC (Appellant) v Sequana SA and others (Respondents)  UKSC 25 On appeal from:  EWCA Civ 112, has clarified some key legal principles related to duties of directors when a company is in financial difficulties or insolvent.
In May 2009, the directors of a company called AWA caused it to distribute a dividend of €135m to its only shareholder, Sequana SA. At the time the May dividend was paid, AWA was solvent on both a balance sheet and a commercial (or cash-flow) basis. However, long-term contingent liabilities and an insurance portfolio of an uncertain value meant there was a real risk that AWA might become insolvent in the future, though insolvency was not imminent, or even probable.
In the event, AWA went into insolvent administration almost 10 years later, in October 2018. BTI sought to recover the amount of the May dividend from AWA’s directors, arguing that the directors’ decision to distribute the May dividend was taken in breach of the creditor duty because the directors had not considered or acted in the interests of AWA’s creditors.
Both the High Court and the Court of Appeal rejected BTI’s creditor-duty claim, as AWA was not insolvent or on the brink of insolvency in May 2009. And now the Supreme Court has unanimously dismissed BTI’s appeal, with all members of the court agreeing that AWA’s directors were not at the relevant time under a duty to consider, or to act in accordance with, the interests of creditors in the circumstances of this appeal.
The judgement clarifies that the duty of directors to promote the success of the company for the benefit of the members as a whole, under section 172(1) of the Companies Act 2006 is, in certain circumstances, modified by the common-law rule that the company’s interests are taken to include the interests of the company’s creditors as a whole (referred to as a “creditor duty”).
Where the company is insolvent, or bordering on insolvency, but is not faced with an inevitable insolvent liquidation or administration, the directors should consider the interests of creditors, balancing them against the interests of shareholders where they may conflict. The greater the company’s financial difficulties, the more the directors should prioritise the interests of creditors. Where an insolvent liquidation or administration is inevitable, the creditors’ interests become paramount as the shareholders cease to retain any valuable interest in the company.
Charles Worth, Head of Business Law at ICAEW, said the clarification of some of the key legal principles is welcome. “The judgement also reinforces some of the practical messages that ICAEW has long been giving to directors, including that they should keep informed of the company’s financial position and should seek expert advice early if the company is in financial difficulty. While the creditor duty at the heart of this case is important, directors also need to be aware of other laws, including insolvency law.”
The Court press release provides a one-page summary of the case and conclusions, but the judgement runs to 160 pages and it may take some time for the full implications to be digested and continuing areas of uncertainty to be considered, Worth added.
- ICAEW’s guide to directors’ duties outlines the key duties of directors and implications for directors if the company is in financial difficulty or becomes insolvent.
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