A 160-page ruling by five Supreme Court justices has clarified the law on the duty owed to creditors by directors of financially distressed companies. In BTI 2014 LLC v Sequana SA all members of the court agreed that a common law duty to creditors exists - but that it operates on a sliding scale. 

The appeal to the Supreme Court concerned a dispute over the 2009 decision by a UK-registered company facing a large environmental clean-up liability to distribute nearly all its assets to its parent, Sequana, rather than to creditors. The Companies Act 2006 requires directors to act in the way they consider would be most likely to promote the success of the company for the benefit of its members as a whole. However the Supreme Court justices, including Lord Reed, president, held that, in certain circumstances, this duty is modified by the common law rule that the company’s interests include those of creditors as a whole. All members agreed that this 'creditor duty' is not a free-standing one. 

The judges ruled that, where the company is insolvent, or bordering on insolvency, but is not faced with an inevitable insolvent liquidation or administration, the directors should consider the interests of creditors, balancing them against the interests of shareholders where they may conflict. The greater the company’s financial difficulties, the more the directors should prioritise the interests of creditors.

In the Sequana case, however, creditor duty was not engaged, the court found. This is because, at the time of the dividend, the subsidiary was not actually or imminently insolvent, nor was insolvency even probable. 

Insolvency specialists welcomed the clarification brought by the judgment. Edward Smith, partner at City firm Travers Smith said: 'This judgment confirms that the requirement to consider the interests of creditors engages when: (a) a company is insolvent or bordering on insolvency; or (b) where an actual insolvent liquidation or administration is probable, rather than being linked to a potentially earlier, and vaguer, trigger point. Where an actual liquidation or administration is not inevitable, the shareholders' interests will remain relevant and the directors will need to balance the interests of creditors and shareholders and act accordingly.'

He noted that the judgment 'recognises that there may be a sliding scale of distress, where the more parlous the financial state of the company, the more the directors should prioritise the interests of creditors.' This clarification should assist directors making challenging decisions in the current economic climate, he added.

Andrew Thompson KC and Ciaran Keller, instructed by Hogan Lovells, appeared for the appellant; Laurence Rabinowitz KC and Niranjan Venkatesan, instructed by Skadden Arps Slate Meagher & Flom and Darrois Villey Maillot Brochier (Paris) for the respondents.