BTI v. Sequana ' What's New For Directors In The Zone Of Insolvency?

• Published date: 27 December 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, Shareholders
• Law Firm: Goodwin Procter LLP
• Author: Mr Simon Thomas, Geoff O'Dea, Oonagh Steel and Tony Horspool

In BTI 2014 LLC v. Sequana SA and Others [2022] UKSC 25 ("Sequana"), the Supreme Court confirmed the existence of a duty owed at common law by company directors to consider the interests of its creditors, and also provided guidance on the timing of the duty's application and its content.

Ultimately, the Supreme Court found that directors do owe a duty to consider a company's creditors' interests prior to insolvency and that this duty is subject to a sliding scale, based on the financial position of the company. In other words, each member of the court in Sequana viewed the obligations of directors to shareholders and creditors as a balancing act, with the balance tilting towards the creditors' interests as the likelihood of insolvency increases. At the point where insolvency is inevitable/irreversible/unavoidable, the interests of creditors become paramount and supplant the interests of shareholders, which cease to bear any weight.

In practical terms, however, the steps that should be taken by directors to protect themselves from liability remain, other things being equal, largely unchanged, and the "wrongful trading" regime, in addition to the common law creditor duty, will be their primary concern when they find themselves in the zone of insolvency.

Wrongful trading

Wrongful trading is a statutory claim of an administrator or liquidator under the Insolvency Act 1986 (the "Insolvency Act") entitling them to apply for a court order that a director contribute personally to the assets of the insolvent company. Wrongful trading liability arises where a director of a company has allowed the company to continue trading -- prior to administration or insolvent liquidation -- in circumstances where the director knew or ought to have concluded at some point before the commencement of the insolvent liquidation or administration that there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration.¹

Liability arises when a director (including a de facto or shadow director) who concludes (or should have concluded) that there is no reasonable prospect of avoiding insolvent liquidation or administration, does not take every step to minimise loss to creditors. Accordingly, it is an important test for both individual directors and company boards when faced with doubtful solvency (i.e., during the twilight period and beyond), whether there remains a reasonable prospect of resolving the company's difficulties in a way that...