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Legal Update: BTI 2014 LTV v Sequana SA & ORS – Director’s Duties

The Supreme Court recently handed down a judgment on the duties of directors of distressed companies in the case of BTI 2014 LTV v Sequana SA & ORS (‘Sequana’). The Court confirmed that directors must consider and give appropriate weight to the interest of the company’s creditors ahead of the interest of its shareholders (the ’Creditor Duty’).

Background Facts

In May 2009, the directors of an English company, AWA, distributed a dividend to its only shareholder, Sequana, in the sum of €135 million. At the time the dividend was distributed, there was no imminent insolvency threat on a balance sheet or cash flow basis. However, AWA did have a long-term pollution-related liability of an uncertain amount, to clean up a polluted river.  This gave rise to a risk, though not a probability, that AWA might become insolvent at some point in the future. In October 2018, AWA went into administration and BTI (the assignee of AWA’s claims) brought a breach of duty claim against the directors of AWA, who authorised the dividend payment. BTI argued that payment of the dividends left insufficient funds in AWA to satisfy the contingent liability and thereby prejudicing the interests of its creditors.

Key issues

Directors’ duties are set out in sections 171 to 177 of the Companies Act 2006 (‘CA 2006). Section 172(1) sets out the general duty to promote the success of the company for the benefit of its shareholders and this is subject to section 172(3) which states “The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company”.  

The Court decided that the duty does exist, and it is not a standalone duty owed to creditors. The duty is not owed directly to creditors, but instead to the company. The duty is a facet of the fiduciary duty of a director to act in a way they consider in good faith and would be most likely to promote the success of the company for the benefit of the shareholders.

The Court agreed that where an insolvent liquidation or administration is inevitable, the creditors’ interest becomes paramount as the shareholders cease to retain any valuable interest in the company.

When does a Creditor Duty arise?

The Court decided that a duty arises when the directors know or ought to know that the company is bordering on insolvency or is insolvent or that an insolvency liquidation or administration is probable. In this context, it means cash flow or balance sheet insolvency, provided it is severe enough to be considered commercially irreversible. A duty will not arise if the company has a real (rather than remote) risk of insolvency in the future.  

Where the company is insolvent, or bordering on insolvency, but is not faced with an inevitable insolvent liquidation or administration, the Court decided that the directors should consider the interests of the creditors, balancing them against the interests of shareholders where they may conflict. The greater the company’s financial difficulties, the more the directors should prioritise the interests of creditors.

It is important that directors take legal advice as soon as it becomes clear that the company may face financial difficulties ahead. This will help to navigate through the challenges the business will face as well as needing to comply with their personal duties.

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