Directors’ duties and the interests of Creditors
Company directors must comply with many duties, as set out in the Companies Act 2006 (“CA 2006”). These duties include acting in a way likely to promote the success of the company for the benefit of its members as a whole, and a duty to consider the interests of creditors of the company.
On 5 October 2022 the Supreme Court handed down its long-awaited judgment in the case of BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25 which examined the duty of directors to consider the interests of creditors, prior to insolvency.
Although the judgment provides some clarification, there are no precise rules. With corporate insolvencies on the increase, now would be an appropriate time for directors to consider the scope of their duties to company creditors, and whether a specific duty has arisen in relation to their own company.
The facts of the case
In 2009, the directors of a company named AWA, declared a dividend of €135 million, to the sole shareholder, Sequana SA. At the time, AWA was solvent, however the directors of AWA knew that it had long-term contingent liabilities relating to environmental issues, for which it had given indemnities.
However, AWA had insurance and the directors estimated this would cover the indemnities provided. It was therefore resolved that AWA was solvent and able to pay dividends, despite the uncertainties which made insolvency a real risk in the long-term. Years later, in 2018, AWA entered into administration. At that point in time, it became clear that the provision for the indemnities was significantly understated and was not completely covered by insurance.
The claimant company, BTI (an assignee of AWA’s claims), then sought to recover the dividend of €135 million on the basis that this decision had breached S172 CA 2006 which requires the consideration of creditor interests where the company is insolvent, or potentially insolvent.
This argument had already failed on appeal, after it was held that the duty was not applicable at the point in time when the dividend was declared.
The judgment
Here, the Supreme Court dismissed the appeal on the basis that, in 2009, although a real risk of insolvency existed in the future, it was not probable and therefore no duty to the creditors existed at the time. It was confirmed that the directors must know or should know, that insolvency is probable, or worse.
It was noted that directors’ have a duty to inform themselves as to the financial position of a company and those who are properly performing their duties with appropriate care and skill should be aware of whether the company is “bordering on insolvency”.
What does this judgment mean for directors?
Unfortunately, this judgment does not provide definitive answers for directors of a company facing financial difficulty.
Practically, directors should ensure they are appraised of the company’s financial position and understand the position regarding its liabilities. They should consider the company’s solvency on a factual basis and keep their legal duties in mind at all times. It is always a good idea to record key decisions in writing, and to seek professional advice if the company’s financial position is in any way unclear.
How can we as Insolvency Practitioners in Birmingham and London help?
Keywood Group is a firm of Licenced Insolvency Practitioners with offices in Birmingham and London, although we do cover the whole of England and Wales. Our team has significant experience dealing with businesses in financial difficulty and our Insolvency Practitioner is fully licenced and regulated by The Insolvency Practitioners Association.
If you have any queries, please contact us for a no obligation chat.
