Supreme Court decision on ‘Creditor Duty’: BTI 2014 LLC v Sequana SA and others [2022] UKSC 25

In BTI 2014 LLC v Sequana SA [2022] UKSC 25, the Supreme Court handed down a landmark judgment concerning company and insolvency law. The judgment concerns the existence, content, and extent of ‘creditor duty’, allegedly on company directors to consider, or to act in accordance with, the interests of the company’s creditors when the company becomes insolvent or approaches insolvency. The ‘creditor duty’ was first adopted in this jurisdiction in the leading case of West Mercia Safetywear Ltd v Dodd [1988] BCLC 250.

In summary, the Supreme Court held that the ‘creditor duty’ exists as an aspect of the director’s fiduciary duty to act in the interests of the company. Further, such duty is engaged when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable.

The Key Facts

In May 2009, the directors of AWA, an English company, distributed a dividend of €135 million to its only shareholder, Sequana SA (“the Dividend”). This payment extinguished by way of set-off almost the whole of a slightly larger debt which Sequana owed to AWA. The Dividend was lawful under the statutory requirements relating to distributions set out in Part 23 of the Companies Act 2006 (“the 2006 Act”) and the common law rules concerning the maintenance of capital.

At the time of the Dividend, AWA was solvent on both a balance sheet and a cash flow basis; its assets exceeded its liabilities, and it was able to pay its debts as they fell due. However, AWA had long term pollution-related contingent liabilities of a very uncertain amount which gave a real risk, although not a probability, that AWA might become insolvent at an uncertain, but not imminent, date in the future.

In October 2018, almost ten years later, AWA went into insolvent administration. BTI 2014 LLC (“BTI”), as assignee of AWA’s claims, sought to recover an amount equivalent to the Dividend from AWA’s directors on the basis that their decision that AWA should distribute the Dividend was a breach of the ‘creditor duty’.

First Instance and Court of Appeal

Both the High Court and the Court of Appeal dismissed the ‘creditor duty’ claim. This was because, although AWA’s directors had not taken into account the interests of AWA’s creditors, the ‘creditor duty’ had not become engaged by May 2009, the date of payment of the Dividend.

The Court of Appeal held that the ‘creditor duty’ did not arise until a company was either actually insolvent, on the brink of insolvency or probably headed for insolvency. A risk of insolvency in the future, however real, was insufficient unless it amounted to a probability. BTI appealed to the Supreme Court.

The Supreme Court’s Decision

The Supreme Court, unanimously dismissing BTI’s appeal, held that AWA’s directors were not under a duty to consider, or to act in accordance with, the interests of the company’s creditors, at the time the Dividend was paid.

Lord Briggs gave the majority judgment with whom Lord Kitchin agreed and Lord Hodge gave a concurring judgment. Lord Reed and Lady Arden each gave judgments which concur for reasons that are broadly similar, although there remain some differences. As Lord Reed noted at [10], “That is not surprising when the court is dealing with a legal principle which has only emerged in recent times and whose basis and incidents have hitherto received little judicial attention in this jurisdiction.”

The judgment concerns four main issues:

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

• The Supreme Court held that there is a ‘creditor duty’, although it is an aspect of the directors’ fiduciary duty to act in the interests of the company, rather than a free-standing duty of its own.
• Section 172(1) of the 2006 Act requires directors to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. The Supreme Court held that there are circumstances in which this duty is modified by the common law rule that the company’s interests are taken to be equivalent to the interests of its members as a whole.
• The effect of the rule is to require the directors to consider the interest of creditors along with those of members. The weight to be given to creditors’ interests will increase as the company’s financial problems become increasingly serious. Where insolvent liquidation or administration is inevitable, the interests of the members cease to bear any weight, and the common law rule consequently requires the company’s interests to be treated as equivalent to the interests of its creditors as a whole.

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

• The Supreme Court held that ‘creditor duty’ can apply to a decision by directors to a pay a dividend which is otherwise lawful. A decision to pay a dividend that is lawful under Part 23 of the Companies Act may still be taken in breach of duty, for example, if it is made by a company that is cash flow insolvent (i.e. unable to pay its debts as they fall due).

3. What is the content of the creditor duty?

• Where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration, the directors should consider the interests of the company’s creditors, as well as the interests of the shareholders, and act accordingly. Where their interests are in conflict, a balancing exercise will be necessary.
• The greater the company’s financial difficulties, the more the directors should prioritise the interests of the creditors. That is most clearly the position when a formal insolvency procedure becomes inevitable, and the shareholders consequently cease to retain any valuable interest in the company.
• The interests of creditors are the interests of creditors as a general body. The directors are not required to consider the interests of particular creditors in a special position.

4. When is the creditor duty engaged?

• The majority held that the ‘creditor duty’ is engaged when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable.
• Lord Reed and Lady Arden agreed that the ‘creditor duty’ is engaged when the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. However, they were less certain and left the question open whether it is essential that the directors know or ought to know such state of affairs.
• Notably, the Supreme Court disagreed with the Court of Appeal’s view that the duty is engaged merely because insolvency is probable or that the interests of creditors are necessarily paramount when the company is insolvent, but liquidation or administration has not become inevitable.
• The Supreme Court unanimously held that the ‘creditor duty’ was not engaged in this case because as the time of payment of the Dividend, AWA was not insolvent, and insolvency was not probable.

Comment & Conclusion

First, the Supreme Court’s judgment provides valuable guidance and welcome clarification regarding the existence, content, and scope of the ‘creditor duty’ of directors.

Second, despite such clarification, future litigation concerning the engagement of the ‘creditor duty’ is likely, due to the fact-sensitive nature of the majority’s new test and the slight differences in reasoning between the members of the Court.

Third, the judgment is a useful reminder to directors that they should always be aware of their statutory and fiduciary duties, particularly when the company is insolvent or bordering on insolvency, or when an insolvent liquidation or administration is probable. Directors should remain cautious of the parameters of when the ‘creditor duty’ is engaged, albeit that a higher threshold has now been set by the Supreme Court compared to the Court of Appeal’s decision.