Laura O'Gorman KC

Overview

In BTI 2014 LLC v Sequana SA [2022] UKSC 25, [2022] 3 WLR 709 the UK Supreme Court has, for the first time, expressly considered the extent to which company directors owe duties to creditors when there is a real risk of insolvency.   Upholding the Court of Appeal, the Supreme Court unanimously dismissed the appeal, agreeing that there was no duty to consider the interests of the creditors on the facts.

However, all members of the Court agreed that such a common law duty could arise.  If insolvency is inevitable, then the creditors' interests become paramount.  The majority said that when insolvency is imminent or a liquidation/administration is probable, the directors should consider the interests of general creditors and give that "appropriate weight", balanced against the interests of shareholders. 

Facts

In May 2009 AWA's directors decided to distribute a dividend of €135m to its only shareholder, Sequana SA, which extinguished by way of set-off almost the whole of a slightly larger debt which Sequana owed to AWA.  The May dividend was lawful — it complied with the statutory scheme regulating payment of dividends in Part 23 of the 2006 Act and with the common law rules about maintenance of capital.  The distribution was made at a time when AWA was solvent, on both a balance sheet and a commercial (or cash flow) basis.  However, the company had long-term pollution-related contingent liabilities of a very uncertain amount which, together with an uncertainty as to the value of one class of its assets (an insurance portfolio), gave rise to a real risk, although not a probability, that AWA might become insolvent at an uncertain but not imminent date in the future.  As matters eventuated, AWA went into insolvent administration in October 2018 (almost 10 years later).

Legal analysis

In the majority judgment, Lord Briggs JSC considered four issues:

1. Is there a common law creditor duty at all?

2. Can the creditor duty apply to a decision by directors to pay a lawful dividend?

3. What is the content of the creditor duty?

4. When is the creditor duty engaged?

Consistent with the approach taken in Australia and New Zealand, the Court accepted there was a common law "creditor duty".  Such a duty can arise even if the statutory regime is not otherwise breached by the impugned behaviour. The content of the duty is more difficult to define.  While there is light still at the end of the tunnel, creditors' interests are not paramount. There is a duty to consider creditor interests, to give them appropriate weight, and to balance them against shareholders' interests where the two may conflict [176]. Existing authorities do not give clear guidance as to when the duty is engaged. Although some cases have applied the test of "a real risk of insolvency" as the trigger, this test was rejected because it was too remote from the event which turns a creditor's prospective entitlement into an actual one [193], [199]. A real risk of insolvency or even a probability of insolvency (which might be temporary) was insufficient to displace the ordinary general duty of directors to promote the success of the company for the benefit of its shareholders [194], [202]. Rather, a preferable trigger was imminent insolvency, or the probability of an insolvent liquidation (or administration) about which the directors know or ought to know [203].

Lord Kitchen agreed with Lord Briggs, and Lord Hodge gave a concurring judgment.

Conclusion

The New Zealand Supreme Court's decision in Debut Homes left open some significant questions about when the creditor duty is engaged and the precise content of it. Those issues, and the significance of this Sequana decision, might be addressed in the upcoming Supreme Court decision due in Mainzeal (focussed on ss 135 and 136). While this decision is interesting in the meantime, the approach taken in the two jurisdictions will not necessarily be the same, given some material differences between the two statutory frameworks. New Zealand directors should continue to take a cautious approach about decisions that may later be scrutinised under s 135 (substantial risk of serious loss to the company's creditors) and s 136 (reasonable grounds to believe the company will be able to perform the obligation).