Company & Commercial
Clarification on Director’s Duties to Creditors Provided by the Supreme Court
In a recent decision by the Supreme Court in the case of BTI 2014 LLC v Sequana SA the Supreme Court provided clarity in the judgement examining the nature and extent that a director has a duty to protect the interests of the company’s creditors as well as when such a duty arises.
Director’s duty to interests of creditors:
The Companies Act 2006 imposes certain duties on a director of a company. One of these duties is to promote the success of the company. As such directors are required to act in a way that is most beneficial to the success of the company and its shareholders.
This duty does in certain circumstances extend to a duty to with regard to the company’s creditors. Furthermore, the Supreme Court has also confirmed a common law duty to act in the interest of the company’s creditors if the company is either insolvent or on the brink of insolvency.
BTI 2014 LLC v Sequana SA
In this matter the Defendant Sequana paid out dividends to shareholders nine years before the company went insolvent. At the time when the dividend was paid the company had no immediate creditors. But it had a contingent liability that could arise in the future and if it did the directors were aware that the company would not have the money to pay the liability and would be rendered insolvent. The liability did arise and as such the company couldn’t pay due to the dividends being paid out 9 years prior.
The court was therefore required to decide whether the directors were in breach of their directors’ duties and as such personally liable to the creditor whose liability had arisen and whether the directors are required to take into account a creditor’s future interests when making decisions.
The court decided that the directors were not liable as the duty to the creditors at the time the dividend had been declared had not yet arisen. The court found that the directors’ duty to consider the creditors’ interests will arise where the directors knew or ought to have known that the company is either insolvent or on the brink of insolvency or in circumstances where it is likely that the company will go into administration. There is no duty where there is simply a risk of future insolvency. The nine-year gap between the declaration of the dividend and the insolvency was not taken into account. Instead, the court determined that what was important was that whilst at the time of the declaration of the dividend there was a risk of future liability arising and making the company insolvent. However, this risk was remote even though it was a real risk.
James Bowles, Solicitor in the Commercial department, said:
“This decision by the court displays an understanding that part of running a business is recognising that there are times that there is a real risk of insolvency but despite that risk it is possible for businesses to perform to the extent that there is no longer such a risk. It would be unfair for directors to need to be concerned about decisions that may impact creditors where there the risk of insolvency amounts to little more than a remote future probability.
“Instead, this duty to creditors only arises and directors are only required to consider the creditors where they know or ought to know that there is an imminent and probable risk of insolvency. To that end directors should make sure that they are fully appraised of the company’s financial position.”
For further advice and assistance please contact our Commercial Team who will be able to assist.