Supreme Court Ruling Provides Clarity On The Need To Consider The Interests of Creditors

The Supreme Court handed down its decision in BTI v Sequana [2022] UKSC 25 on 5 October 2022 in which it dismissed the appeal from the Court of Appeal decision in 2019 and confirmed that directors must continue to be aware of creditors’ interests when a company might consider insolvency but stopped short of holding that the duty to have regard to creditors’ interests is engaged where there is merely the risk of insolvency.

It is trite law that directors owe their fiduciary duties to the company as a whole and not to its individual stakeholders.  Historically, the interests of the company means the interests of its shareholders.  However, in circumstances of insolvency, the interests of creditors override those of the shareholders as they become, in practical terms, the stakeholders of the company.

In the last few years many have referred to the test used by Lord Justice David Richards in the Court of Appeal decision to determine when creditors’ interests are engaged and judged that to be when it is likely, or probable, that a company will become insolvent.  The Supreme Court clarified that the creditor’s interests are engaged when the directors know, or ought to know, that the company is insolvent or bordering on insolvency or that an insolvent liquidation or administration is probable.  Furthermore, it was determined that where the interests of the creditors and shareholders diverge, creditors’ interests are paramount if liquidation is inevitable but before that point a fact balancing exercise was needed to weigh up the competing interests.

In order to manage the risk that this balancing exercise presents, company’s are best advised to ensure that all board decisions regarding material transactions are documented from an early stage and to take professional advice at an early stage whilst monitoring the company’s finances closely.

Whilst the decision of the Supreme Court is unlikely to require many practical changes the economic downturn is likely to put far more financial pressure on many companies and all directors should ensure that they are fully aware of their obligations in this regard.

Posted on 11/16/2022 by Ortolan

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