When it comes to directors having an obligation to the interests of creditors, it often comes down to a judgement call. And, for the landmark case, BTI (2014) LLC versus Sequana SA and others, this decision came down to the Supreme Court.
The Case
After months of anticipation, the Supreme Court panel, including Lord Reed, Lord Hodge, Lord Briggs, Lady Arden and Lord Kitchin, delivered their judgement on 5th October 2022. This case is making history as the first where the Court had to determine if there exists any circumstance in which directors must keep in consideration the interests of creditors. As the respondent company was solvent at the material time when the alleged breach took place, this is also the first occasion where the Court assessed if the duty owed to creditors arises prior to insolvency, as stated by Lord Reed.
In short, the facts of the case involve the company AWA. The Supreme Court needed to assess whether its actions in paying a dividend of €136 million to its sole shareholder, Sequana, and its distribution of the dividends was in accordance with the principles laid down in Part 23 of the Companies Act 2006. When the dividend was paid in May 2009, AWA was solvent based on its cash flow and balance sheet records; however, it did possess deep-rooted liabilities of an unspecified amount. These liabilities were related to the cleaning up and damages claims of a polluted river in the United States.
Nine years after the dividend was paid to Sequana, AWA was subject to insolvency administration in 2018 and BTI argued that the dividend should not have been paid in 2009, as the interests of the creditors should have been protected in light of AWA's insolvency risk. BTI further stated that they were in a breach of duty by failing to take into consideration the interests of the creditors. It must, however, be noted that insolvency was not imminent or certain during the time the dividend was paid.
Once both the High Court and Court of Appeal dismissed BTl's allegation, the case went up to the Supreme Court.
The Supreme Court’s Judgement
In a unanimous decision, the Supreme Court rejected the appeal and held that:
- The directors owe a duty to the creditors of their company, to protect their interests when the company becomes insolvent or is on the verge of becoming insolvent. In essence, there remains a responsibility on the directors to balance the interests of both the creditors and the shareholders of their company. However, the more a company's financial state is crumbling, the more priority should be given to the interest of its creditors. If insolvency becomes inevitable, then the creditor's interest becomes paramount. There will not be a breach of duty if the interests of the creditors are sufficiently considered by the directors in the balancing exercise.
- The interest of the creditors falls within the general scope of the duty owed to the company as a whole. The creditors' interest does not have to be separately considered away from the company itself.
- The majority of the Court held that the interest of the creditors was supposed to be considered with care when the directors became aware of or should have become aware of the company's insolvency or borderline insolvency state. This also incorporates the directors' knowledge that their company will be subject to an insolvency administration. The minority of the Court kept an open mind in this regard, with Lady Arden having the opinion that the path towards insolvency may fluctuate thus directors should have proper knowledge of their company's financial state.
If your business has similar concerns in the face of insolvency, get in touch with our expert solicitors today. Or to read more about recent cases, visit our blog.
