Under the UK law, company directors owe a fiduciary duty to act in the best interest of the company. This interest typically relates to the shareholders and the overall development and success of the company. However, the question of whether a directors’ duty is extended to the company’s creditors was discussed in the case of BTI 2014 LLC v Sequana S.A [2022] UKSC 25 (“Sequana”).
Under section 172 (1) of the Companies Act 2006, it only states that directors are required to have regard to the interest of other stakeholders. However, section 172 (3) expressly preserves the common law rule that requires directors to have regard to the interests of creditors.
Prior to the decision in Sequana, there was a lot of uncertainty about when and if a duty arises to consider the interests of the creditors of the company.
The Supreme Court unanimously agreed that the common law does provide a duty in certain circumstances to the creditors of the company.
If this duty to consider the interest of the creditors only arises under certain conditions, what are they?
The Supreme Court held that the interest of the creditors to the company would trigger where insolvency is probable but not inevitable; or where an insolvent liquidation or administration is inevitable, the directors must treat the creditor’s interest as paramount.
The Supreme Court stated that when a company is faced with potential insolvency, they must consider a balancing act between the interests of the shareholders and the creditors. However, where there is a risk of potential insolvency, the duty is only to consider the interests of the creditors along with the shareholders. It is not until insolvency becomes unavoidable where the interest of the creditors becomes paramount. This is because the Court felt that it would be wrong to implement the duty where the company could still financially recover.
The Supreme Court made it clear that this duty to the creditors is not a stand-alone obligation but rather part of the director’s duties to the company. This effectively broadens the director’s duties to not only the shareholders.
The decision in the Supreme Court was made to both promote “rescue culture” where directors take steps to attempt to save struggling companies, however they also did not want to encourage any director exacerbating the company’s financial situation, for example trading despite being insolvent.
The decision in Sequana has undoubtedly provided a lot of clarity for companies and directors. Directors should take practical steps to implement internal reviews of the company’s financial position to ensure that they are aware of any potential insolvencies arising. If a company is insolvent or likely to become insolvent, directors should take steps to minimise any actions that could be considered as wrongful trading under the insolvency Act 1986, as this could potentially lead to the director being disqualified.
