News | October 7, 2022

Sequana Supreme Court decision – Duty to Creditors

The case of BTI 2014 LLC v Sequana SA and Ors has had a long and tortuous history, culminating in a Supreme Court decision which has now been handed down over a year after a two day hearing in May last year ([2022] UKSC 25). The bare facts can be simply stated. 

A wholly owned subsidiary of Sequana SA, AWA Ltd, had become liable to contribute to/indemnify BAT plc for part of the costs of an environmental clean-up resulting from water pollution. In 2009 its directors made a statement of solvency as to the following year (on both a balance sheet and cash flow basis) and declared, in two tranches, substantialdividends to Sequana which had the effect of reducing or extinguishing a debt owed by Sequana to AWA. The dividends were paid in compliance with Part 23 Companies Act 2006. Some 10 years later AWA went into administration. BTI brought proceedings to recover a part of the dividend payment made in May 2009 on the basis that the directors’ decision to do so was taken in breach of their duty to consider or act in the interests of AWA’s creditors ( a common law duty that has been established in English law since the decision in West Mercia Safetywear Ltd v Dodd; it is referred to by the Supreme Court as “the creditor duty”). At first instance, Rose J, as she then was, rejected the claimant’s attempt to rely on the creditor duty in the circumstances of the case ([2016] EWHC 1686 (Ch)). She was upheld in the Court of Appeal ([2019] EWCA Civ 112) which held that the creditor duty could be engaged short of actual insolvency but was only triggered when the directors knew or should have known that the company under their control was or was likely to become insolvent.

The Supreme Court (Lords Reed, Hodge, Briggs, Kitchen and Lady Arden) unanimously dismissed BTI’s appeal. The judgment deals with four issues.

The first is whether there is in fact a “creditor duty” at all. BTI had argued that there was none of the kind relied on in the courts below. The Supreme Court rejected this contention, finding that it was now firmly established in the common law and capable of being recognised by reason of the inclusion in s 172(1) Companies Act of the words “any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors”. The fact that a payment of dividends had been made in accordance with Part 23 Companies Act or had been ratified did not in some way override the creditor duty, for which there was ample economic justification.

Unsurprisingly, then, the second issue (whether the creditor duty did apply to a decision to pay an otherwise lawful dividend) attracted a positive answer.

Issue three involved consideration of the nature of the creditor duty. The Supreme Court held that:

(1) Where the company was insolvent or bordering on insolvency, but insolvent liquidation or administration was not inevitable, the obligation of the directors was to balance the interests of creditors against those of the shareholders; but the greater the company’s financial difficulties, the greater the need to prioritise the interests of creditors.

(2) The interests of creditors meant the interests of creditorsas a general body; there is no requirement to have regard to the interests of particular creditors in a special position.

(3) Where an insolvent liquidation or administration is inevitable, the interests of creditors become paramount.

The fourth issue (when the creditor duty is engaged) resulted, on the facts of the case, in a holding that it was not engaged because at the time the relevant dividend was paid there was no imminent insolvency. More generally, however, the Supreme Court held, by a majority, that it was engaged when the directors knew or ought to have known that the company was insolvent or bordering on insolvency, or where an insolvent liquidation or administration was probable.

One may be forgiven for thinking that the mountain has laboured long to produce something of a judicial mouse. The judgment is very much in line with conventional jurisprudence on the subject as it has been developing in this country for the last 30-40 years. For that reason, it will come as something of relief to the insolvency profession. However, although the judgment is unanimous as to the result, it is a majority judgment (of Lord Briggs, Lords Kitchen and Hodge concurring); Lord Reed and Lady Arden reached the same result by different, albeit similar, routes of reasoning, so there will, no doubt, still be issues to pick over in the future.