Sequana And The Creditor Duty: An Offshore Perspective

Published date24 October 2022
Subject MatterCorporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Directors and Officers, Trials & Appeals & Compensation, Shareholders
Law FirmCarey Olsen
AuthorMr Richard Brown, Henry Tucker, Marcus Pallot, David Jones and Tim Baildam

On 5 October 2022, the UK Supreme Court delivered its judgment in the case of BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25. This judgment arose from an appeal brought by BTI 2014 LLC against a decision of the English Court of Appeal in 2019.

The Supreme Court's judgment is a landmark decision of significant importance in the arena of company law and directors' duties. It provides welcome clarification from the UK's highest court on issues that are of key importance to directors of companies in financial difficulty, addressing the question of the existence and scope of the so-called "creditor duty", as well as considering the circumstances in which the otherwise lawful approval of a distribution might give rise to liability, and the scope of the doctrine of shareholder ratification. This note briefly summarises the decision and provides insight into its likely application in offshore jurisdictions.

The Judgment concerned a decision taken by company directors to approve a distribution to shareholders in circumstances where the company had contingent liabilities arising from long-term environmental obligations, which were uncertain as to their likelihood to arise and as to quantum. The company was solvent when the distribution was lawfully approved by the directors, but several years later the contingent liabilities crystallised, and the company was then deemed insolvent and entered administration. Claims were brought by an assignee of the company against the directors, on the basis that the distribution was made in breach of the "creditor duty", and by one of the company's creditors to set aside the distribution on the basis that it was a transaction at an undervalue.

Existence of the "creditor duty"

The "creditor duty", otherwise referred to as the rule in West Mercia (taken from the leading decision of the English Court of Appeal in 1988), is the duty of company directors to consider, or to act in accordance with, the interests of a company's creditors when the company becomes insolvent, or when it approaches or is at real risk of insolvency.

In Sequana, the Supreme Court considered as a preliminary question whether the creditor duty existed at all, and decided unanimously that it did (referring to the "impressive unity of the authorities" in this area); the duty arises as a modification of the long-established common law fiduciary duty of a director to act in good faith in the interests of the company. The Court also held unanimously that the "creditor duty" is not a free-standing duty of its own that is separately owed to creditors.

Application and scope of the creditor duty

The Court found in this case that the directors were not in breach of the creditor duty, and dismissed the appeal. However, in dismissing the appeal, the Court made the following key findings in terms of the scope or "content" of the creditor duty:

  • The Court disagreed with the Court of Appeal's view that the creditor duty is triggered simply because insolvency is probable (i.e. it is more likely than not to occur), holding that the creditor duty does not arise merely because the company is at real risk of insolvency which is neither probable nor imminent Rather, the creditor duty is engaged when 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 Court held that it was not correct that the interests of creditors are necessarily paramount when a company is insolvent or bordering on insolvency, but liquidation or administration has not become inevitable. In this scenario, directors should consider the interests of...

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