Insights

The latest developments to Directors’ duties to Creditors

Posted Wednesday 12th October 2022

On the 5th of October 2022, the Supreme Court delivered its decision in BTI 2014 LLC v Sequana SA and others [2022] UKSC 25, clarifying the common law position on directors’ duties to creditors.

insolvent business

In the context of the overall duty of directors to act in good faith in the interests of a company, the decision confirmed the common law duty of directors to take into account and give appropriate weight to the interest of a company’s creditors in certain insolvency circumstances, known as the creditor duty.

Background

In May 2009, a company called AWA paid a dividend of €135 million ($134 million) to its sole shareholder, Sequana. At the time, AWA was solvent and the threat of insolvency was not imminent on a balance sheet or indeed cash flow basis. At the time of the dividend payment, AWA did however have long-term pollution liabilities, which, it was later argued, gave a real risk that AWA might become insolvent at an uncertain date in the future. Almost a decade later, in October 2018, AWA went into insolvent administration. A breach of duty claim was brought by BTI, the assignee of AWA’s claims, seeking recovery of the dividend payment in May 2009 on the basis that the directors’ decision to distribute the dividend breached the directors’ duties to consider and to act in the interest of AWA’s creditors.

This claim was rejected both by the High Court and the Court of Appeal.

Decision

The crux of the issue for the Supreme Court to consider was whether the trigger for the creditors’ interests duty is merely a real risk of, as opposed to a probability of or close proximity to, insolvency.

The appeal to the Supreme Court was rejected and the position set out by the Court of Appeal was affirmed, namely that the duty is triggered once the directors know or ought to know that the company is, or is likely to become, insolvent.

The decision confirmed that the creditor duty arises when the company is insolvent or bordering on insolvency. Insolvency has to be to the extent that it is believed to be commercially irreversible. The creditor duty will not arise if the company simply has a real risk of insolvency in the future.

Key Takeaway

This long-anticipated judgment provides comprehensive guidance on when the duty to consider or take into account the creditors of a company arises. Whilst the decision emphasizes the continued importance of directors’ duties towards creditors, the decision also puts into perspective the significance of the time at which such duties towards creditors needs to be considered.

Please get in touch with the Corporate Team if you have questions or require advice on the impact of this decision for your business.


This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.


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