You may be aware that earlier this month the Supreme Court issued a key judgement which clarifies the law relating to when directors of a UK company need to consider the interests of creditors. The backdrop to this case starts with the Companies Act 2006, which brought into effect for the first time, a statutory set of directors’ duties. While there was a duty in the list to promote the success of a company for the benefit of its members (i.e. shareholders) as a whole, what the list did not deal with however was when and to what extent directors might owe duties to creditors of the company, or to consider their interests.
In a nutshell, the Supreme Court has confirmed in the case of BTI 2014 LLC v Sequana SA and others [2022] UKSC 25 that the directors of a company are under a duty to take the interests of the company’s creditors into account when it enters or approaches insolvency. The case involved the court examining when the duty arises as well as commenting on several aspects of company law that are of importance to companies with cashflow difficulties.
The key points for directors here are:
- Given that the existence of the duty itself has not seriously been in doubt, this was always about the question of when the duty is engaged, and to what extent.
- All directors must promote the success of a company for the benefit of its members as a whole, but when a company enters or is on the verge of insolvency, the directors must start to take the interests of the company’s creditors into account too.
- The case shows that the creditor duty requires a careful exercise of balancing creditor, member, and company interests, which will change according to the financial health of the company, so the more extreme the company’s financial affairs are, the greater weight the directors must give to the creditors’ interests.
- If insolvent liquidation or administration becomes “inevitable”, the members’ interests give way completely to those of the creditors.
- Directors should not pay a dividend while a company is insolvent, including where “cash flow insolvent”, even if the company has sufficient distributable reserves to pay the dividend lawfully under the Companies Act.
Regards to all
R
