(UK) Supreme Court Confirms That Creditor Duty Engaged When Company is Bordering on Insolvency
Following a long wait of 18 months, the Supreme Court has today confirmed that the appeal of the decision in BTI –v- Sequana is unanimously dismissed.
The key question that many of us have been waiting for the answer to is: Does the creditor duty set out in s172(3) of the Companies Act 2006 exist and if so, when is it engaged?
This is an important decision for directors of companies in financial difficulty, or that ultimately end up in an insolvency process (potentially) years down the line (as was the case in Sequana) in clarifying what their duty to creditors is, when it is engaged and how they should act to ensure that they comply with it.
It is also an important decision for insolvency practitioners when determining whether directors of an insolvent company have acted in breach of their duties and therefore whether a claim might be brought against them.
In dismissing the appeal Lord Justice Briggs summarised the conclusions of the Supreme Court as these:
A duty to have regard to and to have regard to the interests of creditors is firmly established in English law.
At the time that the Companies Act 2006 was enacted the creditor duty was firmly established and s172(3) had the effect of confirming it.
There are good principles and justification for the creditor duty – which increase in importance as the company moves towards insolvency. At the same time the importance of shareholder duties diminishes (eventually to zero).
It is much too early to say that the creditor duty is engaged when there is a ‘real risk of insolvency’
The creditor duty arises when the directors knew or ought to have known that the company was bordering on insolvency or an insolvent liquidation is probable.
The content of the creditor duty is to consider the interests of creditors as a whole balanced against the interests of other stakeholders and the circumstances of the company at the time.
Once insolvent liquidation is inevitable – where there is no light at the end of tunnel – creditor interests become paramount.
The above is a high-level summary of the findings in Sequana, and no doubt there will be plenty more to say once the 160 page judgment has been fully digested.
Watch this space!