Sequana ' What You Need To Know

• Published date: 11 October 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, Shareholders
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Bevis Metcalfe, Joanna Valentine and William Sugden

The Supreme Court has delivered its long-awaited decision in BTI 2014 LLC v. Sequana S.A. [2022] UKSC 25. It is a significant decision for the law of directors' duties. For the first time the UK's highest appellate court has considered the circumstances in which directors can be liable for failing to take into account the interests of creditors, thereby upholding the Court of Appeal's 2019 decision.¹ In doing so the Supreme Court affirmed a line of common law cases that have developed the law in this area and have held that directors are required to prioritise creditors' interests in an insolvent liquidation over those of shareholders, and to begin taking creditors' interests into account where insolvency "looms". The Court's unanimous decision is also noteworthy because it confirms the UK has definitively departed from the position in other common law jurisdictions - including Delaware and Canada - that have declined to impose an equivalent duty.

In summary, the Court confirmed that:

1. The duty to consider the interests of creditors is engaged when the directors know, or ought to know, that the company is insolvent or bordering on insolvency. "Insolvent" in this context means cash-flow or balance-sheet insolvency, in line with the statutory tests.

2. When an insolvent liquidation or insolvent administration is inevitable, then the directors must treat the interests of creditors as paramount.

In a move that will be welcomed by directors and practitioners alike, the Supreme Court rejected the argument that directors need to consider the interests of creditors merely when there is a real risk of insolvency. The Court preferred the formulation that imminent insolvency, or the probability of an insolvent liquidation (or administration), are sufficient triggers for the duty to consider creditors' interests.

Background

The facts of the case are complex - featuring environmental damage, acquisitions, and a series of transactions over a number of decades. The key transaction that sparked this litigation was a decision taken by the directors of a company, Arjo Wiggins Appleton Limited (AWA) to pay a dividend to its sole shareholder, Sequana. When the dividend was paid AWA was solvent (on both a cash-flow and balance-sheet basis) and the directors' decision was supported by solvency statements.

However, at the time, AWA:

• was no longer trading;
• had contingent long-term liabilities relating to environmental clean-up costs; and
• had limited assets of uncertain value, being certain investment contracts, insurance policies, and a large...