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A Momentous Decision for Company Law – Directors be Aware!

A Momentous Decision for Company Law – Directors be Aware!

4th November 2022 - Published by Manisha Modasia

In the case of BTI 2014 LLC -v- Sequana SA and Others [2022] the Supreme Court held that when directors know, or should know, that the company is insolvent or about to become insolvent, they must consider the interests of creditors.

The case centred around a lawful €135 million dividend (the ‘Dividend’) made by a company in 2009 to its sole shareholder, which at the same time set off a debt owed by the shareholder to the company. The company was solvent on both a balance sheet and a cashflow basis when the Dividend was made.

However, lingering in the background was a contingent pollution-based liability of an uncertain amount, which created a real risk, although not a probability, that the company would face insolvency at some point in the future. Consequently, the directors of the company paid little attention to the interests of the company’s creditors at the time when the Dividend was made.

Was that the right decision by the directors?

In October 2018, the company went into insolvent administration and the administrators sought to recover the Dividend from the directors on the basis that the Dividend breached the creditor duty owed by the directors. Furthermore, the largest creditor of the company sought to set aside the 2009 transaction as a transaction at an undervalue under section 423 Insolvency Act 1986.

The creditors claim succeeded but no payment was received as the company became insolvent thereafter. The administrators claim, however, proceeded to the Court of Appeal and then to the Supreme Court. The directors argued that the creditor duty was not engaged at the time the Dividend was made as the company was neither insolvent nor was there a probability or imminent risk of insolvency.

The Supreme Court decided that whilst a creditor duty is owed, it is not separate to but instead exists alongside the director’s fiduciary duty to act in good faith in the interests of the company. The company’s interests includes the interests of the company’s members and, in certain circumstances, is modified to also include the interests of its creditors.

The Supreme Court accepted that the real risk of insolvency in 2009 was not sufficient to give rise to the creditor duty. It held that the duty would be triggered:

  • on imminent insolvency (an insolvency that the directors know or ought to know is around the corner and going to happen); or
  • when insolvency is probable (i.e when the risk is greater than 50% about which the directors know or ought to know).

Furthermore, directors will have to consider the interests of creditors when complying with their duty to inform themselves about the company’s financial affairs and its solvency. As ever though, directors must always consider the circumstances of each case as to when the duty is triggered.

So, the creditor duty requires:

  • the directors to balance the interests of the creditors and the interests of the members and give appropriate weight to creditors when the duty is triggered; and
  • the directors to give increasing weight to the interests of the creditors at the expense of the interests of the members as the financial problems of the company become more serious and insolvency appears like an increasing threat.

At Kuits we specialise in directors’ duties and can provide guidance and advice in advance of financial difficulties, as well as assisting directors and companies in directors’ duties disputes should they arise. Do not hesitate to contact a member of Kuits’ Dispute Resolution Department on 0161 838 7807.

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