Supreme Court confirms creditor duty

In BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25, the Supreme Court (SC) confirmed that a company's directors hold no extra duty to a company's creditors until insolvency becomes inevitable. It meant that a large dividend paid whilst the company was solvent was lawful, and was not within reach of the creditors following a later insolvency.

• In 2009, the directors of a company named AWA, declared a dividend of €135 million, to be paid to its only shareholder, Sequana SA.
• The payment of the dividend extinguished most of a larger debt owed to AWA by Sequana.
• The company was, at the time, solvent.
• There were long-term pollution-related contingent liabilities, which made insolvency a real risk in the long term. Despite this, Insolvency was, at the time, not imminent nor probable.
• In 2018, AWA became insolvent and went into Administration.
• The appellant, BTI 2014 LLC (BTI), was the assignee of the claims against AWA and sought to recover the dividend from the directors, accusing them of breaching a duty to the creditors of AWA and so making it an Illegal dividend.
• Appeals to the High Court and the Court of Appeal were dismissed on the basis that the duty did not arise until insolvency. BTI then appealed to the SC.

The SC considered the following questions:

• Did a common law duty to the creditors exist?
  • It was held that there was no separate duty to creditors but the Common law rule that the directors must act in the best interests of the company can, at times, be modified and extended to include the company's creditors, as set out by the Companies Act. Such a duty is also known as the 'rule in West Mercia' from the leading case of West Mercia Safetywear v Dodd [1988] BCLC 250.
  • This modification acknowledges the economic interests in the company that a creditor has and the increasing importance of those interests as a company nears insolvency.
• Can the duty apply to decisions made by directors to pay otherwise lawful dividends?
  • It was held that an otherwise lawful dividend could be in breach of the common law duty. The authority given by Part 23 Companies Act 2006, is subject to any rule of law. The general duty owed by directors as set out in s.172 Companies Act is not excluded in overriding Part 23 and as such the creditor duty is not either.
• What is the creditor's duty?
  • If a company is on the verge of insolvency, but it is not yet a certainty, the interest of creditors should be considered and balanced against those of the shareholders. The greater the financial difficulties of a company, the greater the consideration paid to the interests of the creditors should be.
  • Where insolvency is inevitable, all consideration should be directed towards the creditors. The interest of the shareholders has, at this point, lost all value.
  • The interests of creditors as a whole must be considered but considering specific creditors, in particular, is not required.
• When is the duty engaged?
  
  • A remote risk, even if a real one, is not enough to engage this duty. The directors must know or should know, that insolvency is probable or worse.
  • The key question of when that point is, is left unanswered as it was not relevant in this case.

The SC dismissed the appeal on the basis that in 2009, although a real risk of insolvency existed in the future, it was not probable and so no duty to the creditors existed at the time.

Useful guides on this topic

Dividends: Formalities for companies
This is a briefing note for discussion with directors about the formalities of declaring and paying dividends.

Administration
What does it mean when a business goes into administration? What will happen? 

Directors' responsibilities and duties
What duties and responsibilities does a director have? What is the definition of 'director'?  

External link

BTI 2014 LLC (Appellant) v Sequana SA & Ors (Respondents) [2022] UKSC 25