11th October 2022
The Supreme Court’s decision in BTI v Sequana & Others represents the most significant ruling on the duties of directors of distressed companies of the past 30 years. It is the first occasion on which the Supreme Court has addressed whether company directors owe a duty to consider or act in accordance with the interests of the company’s creditors when the company becomes insolvent, or when it approaches, insolvency (the creditor duty).
The judgment is lengthy, but can be boiled down to the following key points.
Yes, there is a creditor duty owed by directors of a company. A director’s duty to act in good faith in the company’s interests is modified in certain circumstances so that the company’s interests are taken to include the interests of its creditors as a whole. Directors, under certain circumstances, must have regard to and consider the interests of a company’s creditors and prospective creditors. The duty is not a free-standing duty owed directly to the creditors. The duty is owed to the company and arises by virtue of common law, preserved by s172(3) Companies Act 2006.
The duty is triggered at a point short of actual insolvency (which in this context means ‘cash flow’ or balance sheet insolvency as referred to in the Insolvency Act 1986). The particular triggers referred to by the Supreme Court include ‘imminent insolvency‘ or the ‘probability of an insolvent liquidation or administration‘, which the directors ‘know or ought to know about‘ and when the company is ‘insolvent or bordering on insolvency‘. A potentially earlier trigger of ‘a real and not remote risk of insolvency’ was rejected. This is helpful to directors in that the judgment confirms that the creditor duty can be said to arise at a later date than could previously be argued.
The content of the creditor duty, when triggered, is that the interests of the company’s creditors as a whole should be considered in respect of a particular decision. This means that decisions such as paying a dividend, even when the dividend is lawful, need to be taken very carefully if the financial state of the company means that the duty could be triggered. There is ‘sliding scale’: 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 in directors’ decision making as the shareholders cease to retain any valuable interest in the company. The shareholders’ right to ratify decisions and actions of the directors will cease to exist when the creditor duty is engaged.
Although the judgment makes it clear that a creditor duty definitely exists, there is still not total clarity as to the precise timing or trigger point for the engagement of the duty: it will be fact specific. With this in mind, directors and their advisers are likely to continue to take a cautious approach as to when the duty is engaged.
It is crucial that you seek legal advice as soon as possible. One thing is clear, the trigger is not a ‘real risk of insolvency’ which many have previously tried to argue. Here are our top five tips to stay on the right side of the duty:
The key to all of this is to come and talk to one of us in the Restructuring & Insolvency team as early as possible. We can help you navigate the challenges that you face running a business in a difficult market at the same time as complying with your legal duties as directors.
Restructuring & Insolvency
Banking & Finance, Restructuring & Insolvency