The recent Supreme Court judgment BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25 examined the duty of directors to consider the interests of creditors in the event of an approaching insolvency.
The Court re-confirmed that such a duty does exist under English law and has clarified that it arises when a company is "insolvent or bordering on insolvency" or "an insolvent liquidation or administration is probable". When first triggered, this is a duty to take the interests of the company's creditors into account at this time, while also considering the shareholder's interests as part of their overarching duty to promote the success of the company under the Companies Act 2006.
Our colleagues have analysed the case in more detail.
The Financial Times reported on 7 October 2022 that company insolvencies in England and Wales are at their highest level since the immediate aftermath of the Global Financial Crisis, 13 years ago. As such, now is the time that company directors must consider in detail the scope of their duties to creditors and whether there is a risk that that duty has arisen in respect of their business.
The practical impact of the Sequana judgment
Timing
One of the questions before the Supreme Court was precisely when the duty of directors to promote the success of their company for the benefit of its members was displaced in favour of the duty to consider the interests of its creditors in the context of an insolvency. The Court rejected the argument that a "real risk of insolvency" was a sufficient trigger for creditors' interests to be considered.
On the facts in Sequana, the insolvency occurred ten years after the point at which the duty was argued by the Claimant to have arisen (i.e. at the time the €135 million dividend had been paid out). The Justices held that this was too remote. Instead, they considered that the duty was engaged when the company was already "insolvent or bordering on insolvency" or an insolvent liquidation or administration was "probable".
As such, directors must have serious regard to situations where an insolvency may be looming. The Court's wording still leaves a degree of subjectivity as to when precisely those circumstances are said to have arisen, so it is wise to take early legal and financial advice to review the position in relation to creditors and the wider state of the business.
Knowledge
The majority of the Court considered that it is necessary to show that the company's directors knew or ought to have known that an insolvency was probable, whilst the minority view left this question open. However, the Court was clear that directors have a duty to keep themselves informed about their company’s affairs and should always have access to reliable information about the company's current financial position. Lady Arden noted that “[t]he message which this judgment sends out is that directors should stay informed … Directors can and should require the communication to them of warnings if the cash reserves or asset base of the company have been eroded so that creditors may or will not get paid when due." Consequently, directors should keep the solvency of the company under careful review, including with a view to their own potential personal liability.
Weight to give to creditors
The Supreme Court also held that the duty requires company directors to take into account and give appropriate weight to the interests of the company's creditors, balancing these interests against those of the shareholders where there may be conflict.
This duty comes into play in the period between when a company is bordering on insolvency and when an insolvent liquidation or administration is inevitable, at which point the interests of the creditors become paramount in the directors' decision making.
During this time, while creditors are largely expected to be the "guardians of their own interests", the weight to be given to their interests by the company directors inevitably increases in line with a company's deteriorating financial position towards inevitable insolvency.
Legal advice
While the Supreme Court clarified many areas of the law in respect of the duty of directors towards creditors, it remains an uncertain and difficult exercise to ascertain the exact point at which the so called creditor interest is engaged and its exact scope. That will continue to involve an element of commercial judgement by the directors. As such, we would always advise directors to keep comprehensive records and seek timely legal and financial advice well in advance of any potential insolvency event.