Case Summary: BTI 2014 LLC v Sequana SA
The Supreme Court has handed down judgment in the case of BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25. There was agreement amongst all of the Judges that the appeal should be dismissed, because the so-called 'creditor duty' for which the appellant had argued did not arise in the circumstances of the case.
The Court held that the fiduciary duty owed by a company's directors, to act in good faith in the interests of the company, would sometimes include the interests of the creditors as a whole. There was however no standalone duty owed to creditors beyond the duty owed to the company. The object of the duty is the company, rather than its creditors or shareholders.
That duty, in certain circumstances, becomes modified by 'the rule in West Mercia', named after the leading case of West Mercia Safetywear Ltd (in liq) v Dodd [1988] BCLC 250, the effect of which is to require the directors to consider the interests of the company's creditors as well as those of its members. Those circumstances are:
- where the company is insolvent;
- where the company is bordering on insolvency, (even if insolvent liquidation or administration is not inevitable); or
- where an insolvent liquidation or administration is probable.
The majority of the Court held that the duty arose when the directors know, or ought to know, that one of the above circumstances obtained. Lord Reed and Lady Arden left open the question of whether the directors' actual or constructive knowledge was in fact a requirement for the duty to be engaged. In any event, the creditors' interests are invariably to be considered as those of a general body, as opposed to the interests of particular creditors within the group.
On the facts of the case, the appellant was the assignee of a company's claims and sued the assignor company's directors. The transaction which formed the subject of the dispute took place in May 2009, at a time when it was neither inevitable nor probable that the assignor company would become insolvent.
The directors caused a €135mn dividend to be distributed to the company's sole shareholder, in a fashion which was compliant with Part 23 of the Companies Act 2006. Over 9 years later, the company went into insolvent administration. The appellant argued that the duty to consider creditors' interests arose, and had been breached, in May 2009, because there was a 'real risk' of insolvency. The Court in line with the Courts below, dismissed this argument, deciding that a 'real risk', being something short of probable insolvent liquidation or administration, was insufficient.
In the considered and thorough judgments, the Members of the Court held that if a company is in considerable financial difficulty, the directors' fiduciary duty requires them to prioritise the interests of creditors to a greater extent, reflecting a potential (and likely) shift away from prioritising shareholders, where the latter group's interests conflict with those of the creditors. Where it becomes inevitable that the company is going to enter administration or insolvent liquidation, the creditors' interests are paramount at that point.
Lord Reed pointed out in his judgment that this case was the first occasion on which the Supreme Court had considered the questions of (1) whether any such duty to consider creditors' interests even existed as a matter of English law, and (2) whether such a duty arose prior to a company's insolvency. He further recorded that the law in this area was relatively novel (the line of authority regarding the duty having emerged as recently as the 1980s) and was still undergoing development.