Directors must be cautious of the Supreme Court’s decision in BTI v Sequana

Managing a company’s business and making strategic and operational decisions is increasingly the subject of considerable internal and external pressures.

Company directors are responsible for ensuring a company meets its statutory obligations and legal duties. In doing so, they are the subject of a number of legal duties, which arise from both statutory law (e.g. Companies Act 2006) and common law (i.e. law derived from custom and case law). 

Whilst directors owe a statutory duty to promote the success of a company for the benefit of its shareholders, there is a common law rule that this duty is modified in the event of the company’s insolvency, when the interests of creditors are also engaged

The important and long-awaited Supreme Court judgment in BTI 2014 LLC v Sequana SA & others [2002] UKSA 25 addresses at what point this duty towards creditors is engaged.

Q: What are the facts before the Supreme Court?

A: In May 2009, a dividend was declared by the directors of AWA (“the Company”) in the sum of £135 million to its sole shareholder, Sequana SA. The dividend was lawful as it was declared at a time when the Company was in a position to pay its debts as they fell due and its assets exceeded its liabilities.

Whilst the Company was plainly solvent on both a balance sheet and cash flow test basis, it was, however, the subject of a considerable future risk, in the form of liability for costs associated with the cleaning-up of a polluted river. At the time however, the risk of insolvency was neither imminent nor probable. It was almost ten years later that the Company went into insolvent administration.

BTI 2014 LLC took an assignment of the Company’s claims and sued the Company’s directors, arguing that the directors’ decision to distribute the substantial dividend to Sequana SA was a breach of duty towards creditors.

Q: What was the Court of Appeal's decision?

A: The Court of Appeal held that the duty to creditors did not arise until a company was either insolvent, on the brink of insolvency or heading towards insolvency. It was established that a real risk of insolvency in the future was insufficient to trigger the duty to creditors unless it amounted to a probability..

Q: What was the Supreme Court's decision?

A: The Supreme Court held that when a company is insolvent or bordering on insolvency, a duty to creditors does exist.  Indeed, the judgment held that once insolvency is inevitable, the interests of creditors are paramount.

Directors have a duty to consider creditors interests where they know or ought to know that the company is insolvent or bordering on insolvency. This does not, however, arise at the earlier stage where a company faces a real or remote risk of insolvency in the future.

BTI 2014 LLC’s appeal was, therefore, dismissed.

Q: Following the Supreme Court's decision, what is the trigger point for the duty of directors to consider creditors interests?

A: The judgment confirms that the creditor duty is engaged when:

1. The directors know, or ought to know, that the company is insolvent or bordering on insolvency; or
2. That an insolvent liquidation or administration is probable.

The duty is not triggered where a company faces a real and not remote risk of insolvency, which may be temporary and does not necessarily indicate that an insolvent liquidation is probable

Q: A director is not formally appointed at Companies House but runs and manages the company. Does the Supreme Court's decision apply to them?

A: Yes. Regardless of a director’s title and appointment status, all directors (including de facto and shadow directors) have duties.

Q: What are the practical implications?

A: Determining precisely when a company is on the brink of insolvency or is insolvent will be fact-sensitive.

Whilst the Supreme Court’s decision sets a later trigger point for the duty upon directors to consider the interests of creditors, it is not without risk.

The greater the financial difficulties faced by a business, the more the interests of the whole body of creditors are engaged. 

Directors need to be mindful, therefore, of taking decisions where the inevitable outcome is to result in insolvent administration or liquidation, as that will fully engage the duty to creditors.

Directors may unwittingly breach their duties and this judgment may potentially make claims against them easier.

The Supreme Court’s decision in Sequana serves as a useful reminder for directors to take specialist legal advice at an early stage, preferably before taking decisions which could result in personal liability in the future. 

Here at Weightmans we frequently advise directors in relation to their duties owed to their respective companies and creditors. We are seeing increased demand for contingency advice for corporate entities feeling the cash squeeze in the current economic times due to the after effects of the COVID-19 pandemic, the rising cost of energy and supply chain costs.