Sequana : The Creditor Duty?
The UK Supreme Court issued their decision in the case of BTI 2014 LLC against Sequana SA and Others on 5 October 2022. The decision has been awaited for some time. The UK Supreme Court was considering for the very first time the question of whether, as has been indicated a number of times in the lower courts, whether Directors of companies owe duties to the creditors of that company? If they did, when would the duty apply, and what would the duty involve?
The Decision of the Court
The decision of the Court is a detailed treatise on corporate insolvency and related company law. However, it is hard to navigate, which is probably inevitable, given, as the Justices were clear to point out, that the law in this area is very much still developing. Some questions have been unanswered. Provisional views have been given but further case law will be required to determine some questions.
What then can be said with certainty according to the judgement:
- Director fiduciary duties at Common Law must be interpreted in harmony with the statutory framework;
- The duty to promote the success of the company and act in its best interests, will, in certain circumstances, involve balancing the interests of creditors with shareholders (there is no separate creditor duty);
- If insolvent liquidation or administration is inevitable Directors are likely to have to treat creditors’ interests as paramount. Two of the Justices spoke about considering whether a potential stakeholder had “skin in the game or not”;
- The presence of a risk of insolvency will not be enough to automatically trigger the weighing of duties in favour of creditors over shareholders. Rather, and there were different views expressed by the members of the court, any earlier trigger point would still require insolvency in legal terms, the bordering on insolvency, or the probability of an insolvent liquidation or administration. The balance of duty between creditor and shareholder will depend upon the financial circumstances of the company. If it is clear that shareholders do not retain any financial interest in the company then creditor interest would be paramount.
We appreciate that some practitioners will consider that the judgement raises questions. However, at its core it is helpful because it affirms the fact that Directors should be advised that they have to have creditor interests in mind if they are insolvent, verging on insolvency or, we think, if it is probable that an insolvent procedure cannot be avoided. The exact consideration creditors are entitled to, will depend on the financial circumstances of the company and who has “skin in the game”. We do concede that it is likely there is going to have to be further litigation to test the extent of the duty.
BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (firstname.lastname@example.org). This briefing note is current as at 18 October 2022 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).