Supreme Court Judgment clarifies when director's duties to creditors will be triggered

In a landmark judgment for company directors, the Supreme Court has clarified the scope of the so-called “Creditor Duty” and when this duty will be triggered, in the case of BTI 2014 LLC -v- Sequana SA and others.

This is particularly important in the current climate of financial instability and provides a 'guiding light' for directors on how to minimise the risk of personal claims against them where their company is, or may be, at risk of insolvency.

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What is the "Creditor Duty"?

The Creditor Duty is a duty, owed by directors, to consider or act in accordance with the interests of the company's creditors. It is triggered when the company is insolvent, bordering on insolvency or when an insolvent liquidation or administration is probable.

Background

Arjo Wiggins Appleton Limited (“AWA”) was a wholly-owned subsidiary of Sequana SA (“Sequana”). In May 2009, AWA's directors caused it to distribute a dividend of €135 million to its only shareholder and parent company, Sequana. The dividend was lawful and made at a time when AWA was solvent, but had a significant future liability relating to an environmental claim being pursued against it in the United States. As a result of the environmental claim, there was a real risk - but not a probability - that AWA would become insolvent at some point in the future.Almost ten years passed, until October 2018, at which time AWA entered into insolvency. Upon its insolvency, AWA's assigned its claim against its directors to BTI 2014 LLC (“BTI”), and BTI sought to recover an amount equivalent to the dividend from AWA's directors, on the alleged basis that AWA's directors had breached the Creditor Duty by distributing the dividend when there was a real risk of AWA becoming insolvent.Court proceedings were commenced by BTI against AWA's directors. The claim failed at the initial stage on the basis that the Creditor Duty had not been triggered by May 2009, as AWA was not insolvent, not bordering on insolvency and insolvent liquidation or administration was not probable (despite there being a real risk of insolvency). BTI appealed the decision to the Court of Appeal, with this appeal failing on a similar basis - that a risk of insolvency in the future, however real, was insufficient to trigger the Creditor Duty.BTI appealed to the Supreme Court, arguing that a real risk of insolvency is sufficient to engage the Creditor Duty.The Supreme Court's judgmentRejecting the appeal, the Supreme Court confirmed that a real risk of insolvency is not sufficient to trigger the Creditor Duty and that it will typically only be triggered where a company is insolvent, bordering on insolvency or when an insolvent liquidation or administration is probable. However, the Supreme Court emphasised that the greater the company's financial difficulties, the more the directors should prioritise the interests of creditors.On the facts of this case, the Supreme Court found that the Creditor Duty had not been triggered by May 2009, at the time the dividend was declared, as there was only a real risk of insolvency and AWA was neither bordering on insolvency, nor was an insolvent liquidation or administration probable. BTI's appeal therefore failed.Take away pointsThis case reaffirms the requirement on directors to ensure that they are considering the interests of company creditors from the stage of at least the company bordering on insolvency or an insolvent liquidation or administration becoming probable. Had the Supreme Court found in favour of BTI, it is likely that the directors would have been liable for certain losses suffered by the company's creditors, potentially to the sum of the dividend paid out.This case is a helpful reminder to directors to ensure that the Creditor Duty is considered when the company is in financial difficulty and to seek advice when appropriate.

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If you have any queries, or if the issues addressed in this article impact upon you or your company, please contact: Louise Wilson | 0345 073 8583 | [email protected] (Dispute Resolution)Josh Middleton | 0345 128 7955 | [email protected] (Dispute Resolution)Isobel Callaghan | 0345 404 4175 | [email protected] (Insolvency)