Directors Duties – ‘Creditor Duty’ Does Exist
On 5 October 2022 the Supreme Court handed down a ‘momentous decision for company law’ (in the words of Lady Arden) in the landmark case of BTI 2014 LLC v Sequana S.A. [2022] UKSC 25 (“Sequana”). It is the first time that the UK’s highest court has been tasked with considering whether the directors of a company must consider the interests of a company’s creditors in certain circumstances.
Sequana can be accessed here whilst the Court press release (which is much shorter and more accessible) can be accessed here.
Does a ‘creditor duty’ exist?
The Court held that a creditor duty does exist. The court considered that there was a principled justification for such a duty. Whilst creditors always have an economic interest in a company’s assets, where the company is insolvent or borders insolvency, this interest increases in relativity. In such a context, the creditors’ interests should be considered by the directors and not prejudiced. However, this duty is not free-standing. This could be likened to a sliding scale, where the closer a company is to unavoidable insolvency the greater the creditors’ interests and the more avoidable an insolvency is the greater the shareholders’ interests.
When does the duty arise?
The duty arises where the company is actually insolvent or is bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration. The Court explained that insolvency meant either cash-flow insolvent or balance sheet insolvent as set out in section 123 Insolvency Act 1986. For instance, an otherwise lawful dividend should not be allowed to be paid by a company where it is cash-flow insolvent.
When insolvent liquidation or administration is inevitable, creditors’ duties become paramount, overriding the shareholders’ interests completely.
What does the duty entail?
When the duty is triggered, the directors should balance the creditors’ interests against the interests of the shareholders which may conflict. Creditors’ interests should be considered as a whole. The duty is owed to the company as part of directors’ general duties, rather than directly to the creditors.
It remains to be seen exactly how close a company needs to be to insolvency before the duty is triggered and how essential the directors’ knowledge of the financial position of the company is to whether the duty is engaged. The majority of the Judges held that the duty required actual knowledge of the financial position of the company by its directors (or that they ought to have knowledge of the position), though a minority expressed uncertainty that knowledge was essential for the duty to be triggered.
The case reiterates the importance of understanding the importance of directors’ duties and what steps should be taken to ensure they are complied with. Rollits offers directors duties training. If you would like to know more, please contact us.
