When Is A Company Director Required To Consider Creditor Interests?

One of the most challenging questions in insolvency law is at what point does a director’s duty to act in the best interests of the company and its members become a duty to act in the interests of the company’s creditors? The line between solvency and insolvency is a fine one, and the last thing an embattled director needs is to face civil action from shareholders and/or creditors on the grounds they have breached their directors’ duties.

What are directors’ duties under the Companies Act 2006?

The general duties of a company director are found in the Companies Act (CA) 2006, sections 171-177. They are:

    • A company director must act per the company’s constitution and only exercise their powers for the purposes for which they are given (section 171).
    • A company director must act in good faith and promote the success of the company (section 172 (1)).
  • A company director must exercise independent judgement. They may consider the opinion or take the advice of others, but it must be their decision regarding whether or not to follow the advice (section 173).
  • A company director must exercise reasonable care, skill, and due diligence when undertaking their duties (section 174).
  • A company director must not place themselves in a position where there is a conflict, or possible conflict, between the duties they owe the company and either their personal interests or other duties owed to a third party (section 175).
  • A company director must not accept any benefits which are conferred on them due to their position as a company director. Although the meaning of the word ‘benefit’ is not specified in the Companies Act 2006 it has been defined by the OED as a favourable or helpful factor, circumstance, advantage, or profit (section 176).
  • If a company director has an interest in a proposed transaction or arrangement with the company they must declare the interest to their fellow directors (section 177).

Section 172(3) of the Companies Act 2006 makes the duty under section 172(1) “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”. 

In 2022, the Supreme Court in BTI 2014 LLV v Sequana SA & Ors [2022] UKSC 25, considered the key issue of when a company director needs to move their focus to prioritising creditors’ interests.

In May 2009, the directors of a company called AWA caused it to distribute a dividend of €135 million (the May dividend) to its only shareholder, Sequana SA (Sequana). At the time the May dividend was paid, AWA was solvent on both a balance sheet and a commercial (or cash flow) basis. However, it had long-term pollution-related conditional liabilities of an uncertain amount and an insurance portfolio of ambiguous value. There was a real risk that AWA might fall into insolvency, but at the time of the payment, this was not an immediate threat or even a probability.

However, a decade later, AWA became insolvent. The Appellant, BTI 2014 LLC (BTI) was the assignee of AWA’s claims. Arguing that the directors’ decision to distribute the May dividend was taken in breach of the creditor duty because the directors had not considered or acted in the interests of AWA’s creditors, it attempted to claw back the money. The High Court and the Court of Appeal rejected the creditor duty claim, with the latter court ruling that the creditor duty did not arise until a company was either actually insolvent, on the brink of insolvency, or probably headed for insolvency. Its provisional view was that the creditor duty became paramount as soon as the company became insolvent. At the time the May dividend was paid, none of the aforementioned conditions applied to AWA.

AWA appealed to the Supreme Court which unanimously rejected the appeal, concluding that at the time the May dividend was paid out, the directors were not under a duty to consider, or to act in accordance with, the interests of creditors. 

In making the decision, the Supreme Court made several key observations:

  • The majority of the Court held that the creditor duty is engaged when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. Lord Reed and Lady Arden agreed, but they left open the question of whether it is essential that the directors know or ought to know that this is the case.
  • Shareholders could not authorise or ratify a transaction which would jeopardise the company’s solvency or cause loss to its creditors.
  • If insolvency is inevitable, creditors’ interests are paramount and before that, there should be a fact sensitive balancing exercise to weigh up the competing interests by reference to the degree of financial distress.

“Where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration, the directors’ fiduciary duty to act in the company’s interests has to reflect the fact that both the shareholders and the creditors have an interest in the company’s affairs. In those circumstances, the directors should have regard to the interests of the company’s general body of creditors, as well as to the interests of the general body of shareholders, and act accordingly. Where their interests are in conflict, a balancing exercise will be necessary.“

Wrapping up

Although the decision in BTI 2014 LLV v Sequana SA & Ors does not provide a nice, neat trigger point for when directors need to consider the company’s creditors and how this should be done, it does provide some reliable guidance. To ensure they are complying with their duties, directors will need to consider the company’s financial position as a whole and any identifiable risks that could threaten its future solvency. If the company appears at risk of insolvency, regular assessments need to be made to ensure directors do not fall foul of wrongful trading laws.

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Tanveer Qureshi specialises in general crime, white-collar crime and regulatory investigations and prosecutions.  If you require legal representation or have a related question, please contact me for free consultation or call me directly on ​0203 637 2190.