The Court of Appeal in BTI 2014 LLC v Sequana SA and others; Sequana SA v Bat Industries Plc and others [2019] EWCA Civ 112 (Sequana) has clarified that the creditors’ interest duty arises when the directors know or should have known that the company is or is likely to become insolvent. In this context, “likely” means probable.

Directors’ Duties

By way of background, duties owed by directors to the company (directors’ duties) have been developed by the courts over hundreds of years. The duties were subsequently enshrined into statute by the Companies Act 2006 (CA), sections 171 – 177.

The directors’ duties listed in the CA are not intended to be an exhaustive list, however they cover a range of duties, for example the “duty to act within powers” (CA section 171) and the “duty to avoid conflicts of interest” (CA section 175).

Arguably, the most conflicting duty for a director is the “duty to promote the success of the company” (CA section 172). In particular, CA section 172(1) provides:

“A director of a company must act in the way he considers… would be most likely to promote the success of the company for the benefit of its members as a whole…”

This section is subject to CA section 172(3), “requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company”. However, at what point is the duty to act in the interests of creditors (creditors’ interest duty)engaged?

Sequana

This case primarily dealt with two issues:

 

  • the appellant, BTI (a subsidiary of British American Tobacco) challenged a decision that a dividend paid by AWA (a wholly owned subsidiary of Sequana) to Sequana had not been paid in breach of the creditors’ interest duty; and
  • Sequana cross-appealed against a decision that the dividend fell within the Insolvency Act 1986 (IA), section 423 (“transactions defrauding creditors”).

 

Dealing with issue two, it was held that the payment of a dividend is capable of falling within IA section 423. The purpose of the dividend being paid by AWA was to eliminate the risk that Sequana would be responsible for AWA’s liabilities – it was a transaction entered into with the object of putting assets beyond the reach of potential claimants or of otherwise prejudicing their interests. Sequana’s cross-appeal was therefore dismissed on this point.

In relation to issue one, the Court of Appeal held that the creditors’ interest duty arose when the directors knew or should have known that the company was or was likely to become insolvent. In that context, “likely” meant probable. At the time or as a result of the dividend payment, there was no justification for finding that AWA was insolvent or was likely to become insolvent and therefore BTI’s appeal was dismissed.

But what has changed?

This does depend on your view of the case. Before deciding on the wording above, the Court of Appeal reviewed the previous authorities and the parties’ submissions in the case and suggested that there were at least four possible answers of when the creditors’ interest duty was engaged:

  • when the company was actually insolvent, either on a cash flow or balance sheet basis;
  • when the company was on the verge of insolvency or nearing or approaching insolvency;
  • when the company was likely to become insolvent; and
  • when there was a real, as opposed to a remote, risk of insolvency.

It could be argued that the wording used by the Court of Appeal and the wording in points 2, 3 and 4 above essentially mean the same thing. As such, the law has not really changed.

Alternatively, another view is that the Court of Appeal decision in Sequana has clarified the difficult issue of when the creditors’ interest duty is engaged.

Regardless of this, the Court of Appeal decided against determining the “important issue” of the extent of the creditors’ interest duty once engaged. They did comment that it is hard to see that creditors’ interests could be anything but paramount where the directors know or ought to know that the company is presently and actually insolvent. However, they felt that this point should not be decided in the case.

Appeal to the Supreme Court?

The Court of Appeal decision in Sequana may not be the final word on this. There has been suggestion that Sequana may intend to seek permission to appeal to the Supreme Court – whether permission will be sought or granted is not clear at this stage.

Alan Bennett

Email: a.bennett@ashfords.co.uk