A Balancing Act ' When Do Directors Owe A Duty To Creditors?

• Published date: 17 January 2023
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, Shareholders
• Law Firm: Forsters
• Author: Ms Lianne Baker and Josh Baxter

On 5 October 2022, the Supreme Court handed down its long-awaited judgment in the case of BTI v Sequana. The decision, described as "momentous" for company law, has provided much-needed clarification on the duty owed by company directors to creditors.

Understanding your duties as a director is a precondition of the role (for a general overview of your general duties, see here), but being aware of the transition between acting for the benefit of a company's members and its creditors is even more significant given the current economic uncertainties.

In summary, the key points to come out of the recent decision are:

• The creditors' duty is engaged later in the insolvency process than previously thought.
• Directors should weigh the interests of the company's creditors against those of its shareholders, engaging in a balancing exercise where these interests come into conflict.
• The closer a company is to insolvency, the more significant the interests of its creditors become.
• It remains crucial that directors continue to keep themselves fully informed and up to date with company affairs, documenting the reasons for significant decisions affecting the company.
• As soon as it becomes apparent that a company is facing financial difficulties, the directors should seek independent legal advice.

Background

In 2009 the directors of a company called AWA paid a dividend of EUR 135 million to its sole shareholder, Sequana SA ("Sequana").

• At the time the dividend was paid, AWA was solvent on both a balance sheet and cash flow basis but had a contingent liability of an uncertain amount which related to the clean-up costs of a Wisconsin river. Consequently, there was a real risk that AWA might become insolvent in the future, although insolvency was not imminent, or even probable, at the time.
• The clean-up costs were much higher than anticipated and AWA entered insolvent administration, albeit almost ten years after the payment of the dividend. BTI (as assignee of AWA's claims) sought to recover the dividend from AWA's directors on the grounds that they had made the payment in breach of their common law duty to have regard to the interests of the company's creditors.
• Both the High Court and the Court of Appeal rejected this claim. The Court of Appeal found that the creditor duty was not triggered until a company was either insolvent, on the brink of insolvency or probably headed for insolvency. Since AWA was not insolvent or on the brink of insolvency in 2009, BTI's claim...