UK: UK Supreme Court Rules On ‘Creditors' Interest Duty'

The Supreme Court of the United Kingdom in BTI 2014 LLC v Sequana SA [2022] UKSC 25¹ has ruled on the point at which company directors must have regard to the interests of creditors (the so-called "creditors' interest duty") as set out in section 172 of the Companies Act 2006² (the "2006 Act"). Section 172(3) of the 2006 Act extends such duty when insolvency of a company is inevitable in order to encompass not only the interests of shareholders, but the general body of a company's creditors.³

The judgment modifies the previous Court of Appeal decision in BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112,⁴ which provided that the creditors' interest duty applies when the directors know or ought to know that a company is or is likely to become insolvent and/or if there is a real and not a remote risk of insolvency.

The Supreme Court's much anticipated judgment not only provides company directors and their advisors with some breathing space, but it also provides welcome clarification of company directors' duties which, as Lord Reed described in his judgment in the case, "go to the heart of our understanding of company law."⁵

The Facts

In May 2009, the directors of Sequana's subsidiary, AWA, made the decision to pay a €135m dividend to Sequana, which extinguished the majority of the larger debt owed to AWA by Sequana (the "Dividend"). When the Dividend was paid, AWA was solvent (on both a balance sheet and cash flow basis) and the payment was compliant with Part 23 of the 2006 Act.⁶ At the time, however, AWA had long-term pollution related contingent liabilities of an uncertain amount and there was a real risk that AWA may become insolvent in the future.⁷

AWA entered insolvent administration approximately 10 years after the Dividend. BTI, as an assignee of AWA's claims, sought to recover an amount equal to the Dividend from AWA's directors on the basis that their decision to pay the Dividend breached the creditors' interest duty.⁸

Following consideration by the High Court, the Court of Appeal concluded that the creditors' interest duty was only applicable when a company is insolvent; on the verge of insolvency; when insolvency is likely; or where there is a real risk of insolvency.⁹ This led to BTI appealing to the Supreme Court.

Decision

In the 159-page judgment, the Supreme Court considered, amongst other matters, whether the creditors' interest duty existed and, if so, the timing for such duty to apply and its effects once applied.

The Supreme Court unanimously dismissed the appeal on the basis that, at the time of the Dividend, AWA was not actually insolvent, bordering on insolvency, or likely to become insolvent and that the creditors' interest duty should not apply purely as a result of a company being at a real – not a remote – risk of insolvency.¹⁰

The Supreme Court did, however, reconfirm that the creditors' interest duty arises when company directors know or ought to know that a company is insolvent, is bordering on insolvency, or is likely to become insolvent (i.e. probable, being where there is more than a 50 percent chance of insolvency based on a balance sheet or cash flow test).¹¹

Furthermore, the Supreme Court made it clear that the creditors' interest duty is not a separate duty owed directly to creditors but that such duty forms part of company directors' general fiduciary duty to act in the interests of the company.¹² The judgment also reinforced that company directors should continue to be conscious of other statutory obligations, such as the wrongful trading regime in section 214 of the Insolvency Act 1986 (the "1986 Act") and avoidance provisions in sections 238 and 239 of the 1986 Act.¹³

Comments and the Practical Implications

In her judgment, Lady Arden described the case as a "momentous decision for company law," providing long-awaited clarification that company directors are indeed required to consider the interests of creditors in certain circumstances.¹⁴

The Supreme Court's decision will be welcomed by company directors who are particularly concerned with contingent and/or unqualified liabilities as the decision confirms that the trigger point for the creditors' interest duty occurs later than was previously stated. The decision also appears to recognise that an onerous duty arising as early as where there is a "real" risk of insolvency could damage rescue efforts and lead to excessively cautious decisions by directors, whilst acknowledging that creditors deserve some protection when it is their interests that are primarily at risk.

The trigger point for, and content of, the creditors' interests' duty will continue to be matters on which directors will need to take legal advice in order to ensure statutory and case law obligations are fully complied with.

Footnotes

1. BTI 2014 LLC v Sequana SA [2022] UKSC 25.

2. Companies Act 2006, section 172.

3. Companies Act 2006, section 172(3).

4. BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112.

5. BTI 2014 LLC v Sequana SA [2022] UKSC 25 [7] (Reed LJ).

6. Companies Act 2006, Part 23.

7 https://www.supremecourt.uk/press-summary/uksc-2019-0046.html

8 https://www.supremecourt.uk/press-summary/uksc-2019-0046.html

9. (n 4).

10. BTI 2014 LLC v Sequana SA [2022] UKSC 25 [10] (Reed LJ).

11. BTI 2014 LLC v Sequana SA [2022] UKSC 25.

12. BTI 2014 LLC v Sequana SA [2022] UKSC 25 [11].

13. Insolvency Act 1986, ss 214, 238 and 239.

14. BTI 2014 LLC v Sequana SA [2022] UKSC 25 [248] (Arden LJ).

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