The UK’s Supreme Court has dismissed a claim calling for the law to be changed to force company directors to start taking creditors into account at the first risk of insolvency. The ruling reaffirms the current position in law in stating that creditors' interests duty arises when the directors know or ought to know the company is insolvent or bordering on insolvency, or insolvency is probable.
The case comes after debt collector BTI filed a lawsuit against French paper maker Sequana seeking to reclaim a €135m (£188m) dividend paid out to it by its subsidiary AWA in May 2009. Although AWA was solvent at the time, the Scottish paper manufacturer had long-term pollution-related liabilities that meant there was a real risk it might become insolvent in the future.
BTI brought a breach of duty claim against the directors of the subsidiary who authorised the dividend payment in October 2018, almost a decade after it first paid out the dividend, arguing that it had been paid in breach of their duty to have regard to the interests of its creditors.
The Appellant in Sequana argued that the directors’ duties to prioritise the interests of creditors ought to apply where a company is at a real ( as opposed to remote ) risk of insolvency. The Supreme Court disagreed that the “ creditor duty” could be triggered merely by a real risk of insolvency which is neither probable nor imminent. The Supreme Court held that the trigger point for the creditor duty is:
when the company is insolvent or bordering on insolvency.
where an insolvent liquidation or administration is probable.
where the transaction in question would place the company in either of the above situations.
The Supreme Court also held that the creditor duty to consider the interests of creditors meant the interests of creditors as a general body. There is no requirement to have regard to the interests of particular creditors in a special position.
The ruling will likely be welcomed by company directors due to it clarifying to directors the trigger point when the creditor duty arises.
If anyone requires any advice on the implications of this case or insolvency generally, please contact John Harvey by email on john.harvey@laytons.com.
