The Supreme Court has handed down a landmark judgement in BTI 2014 LLC v Sequana SA, which concerns the circumstances and extent to which the company directors must consider the interests of creditors with regard to their common law duties.
Summary of the case
In May 2009, directors of a company called AWA paid a dividend of €135 million to its only shareholder Sequana SA. At the time the dividend was paid, AWA was solvent. The payment of the dividend was compliant with the statutory requirements under the Companies Act 2006 ('CA 2006') and with the common law rules about capital maintenance. However, AWA had long-term pollution-related contingent liabilities (a potential liability that may occur in the future) of an uncertain amount relating to needing to clean up a polluted river. This gave rise to a 'real' risk that AWA might become insolvent in the future, although insolvency was not 'probable'. In October 2018, the risk materialised and AWA went into insolvent administration.
AWA's assignee, BT1 2014 LLC, brought a claim alleging that the directors' decision to distribute the dividend breached their duty to consider the creditors' interests, given that there was a real risk of the company becoming insolvent in the future.
The Supreme Court held that directors, as part of their duty to act in good faith in the interests of the company, must also consider the interest of creditors (section 172(3) of the CA 2006 applied). However, it was unanimously found that although the duty exists, it cannot be triggered merely by a real risk of insolvency. Therefore, at the time of the dividend payment, the directors were not under any duty to consider the interests of the company's creditors because AWA was neither actually nor imminently insolvent, nor was insolvency probable.
Key takeaways for company directors
The judgment gives guidance that the duty to consider creditors' interest arises when the directors know or ought to know the company is insolvent, the company is bordering on insolvency, or where insolvency is probable. The directors' fiduciary duty requires them to give consideration and weight to creditors' interest in a manner that is appropriate to the circumstances of the company at the time. This must be balanced against the potentially conflicting interests of other stakeholders, including members. However, where insolvency is inevitable, creditors' interests become paramount.
Accordingly, it is crucial for directors to stay up-to-date with the company's affairs and assess its financial position regularly. The general principle is that the more the financial difficulties of the company, the greater weight and consideration should be given to the creditors' interest.
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