UK Supreme Court Rules On 'Creditors' Interest Duty'

• Published date: 12 October 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy
• Law Firm: Brown Rudnick LLP
• Author: Tristan Dollie and Imogen Wilson

The Supreme Court of the United Kingdom in BTI 2014 LLC v Sequana SA [2022] UKSC 25¹ has ruled on the point at which company directors must have regard to the interests of creditors (the so-called "creditors' interest duty") as set out in section 172 of the Companies Act 2006² (the "2006 Act"). Section 172(3) of the 2006 Act extends such duty when insolvency of a company is inevitable in order to encompass not only the interests of shareholders, but the general body of a company's creditors.³

The judgment modifies the previous Court of Appeal decision in BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112,⁴ which provided that the creditors' interest duty applies when the directors know or ought to know that a company is or is likely to become insolvent and/or if there is a real and not a remote risk of insolvency.

The Supreme Court's much anticipated judgment not only provides company directors and their advisors with some breathing space, but it also provides welcome clarification of company directors' duties which, as Lord Reed described in his judgment in the case, "go to the heart of our understanding of company law."⁵

The Facts

In May 2009, the directors of Sequana's subsidiary, AWA, made the decision to pay a '135m dividend to Sequana, which extinguished the majority of the larger debt owed to AWA by Sequana (the "Dividend"). When the Dividend was paid, AWA was solvent (on both a balance sheet and cash flow basis) and the payment was compliant with Part 23 of the 2006 Act.⁶ At the time, however, AWA had long-term pollution related contingent liabilities of an uncertain amount and there was a real risk that AWA may become insolvent in the future.⁷

AWA entered insolvent administration approximately 10 years after the Dividend. BTI, as an assignee of AWA's claims, sought to recover an amount equal to the Dividend from AWA's directors on the basis that their decision to pay the Dividend breached the creditors' interest duty.⁸

Following consideration by the High Court, the Court of Appeal concluded that the creditors' interest duty was only applicable when a company is insolvent; on the verge of insolvency; when insolvency is likely; or where there is a real risk of insolvency.⁹ This led to BTI appealing to the Supreme Court.

Decision

In the 159-page judgment, the Supreme Court considered, amongst other matters, whether the creditors' interest duty existed and, if so, the timing for such duty to apply and its effects once applied.

The Supreme Court...