BTI 2014 LLC v Sequana SA and others – Supreme Court decision

The Judgment of the Supreme Court in BTI 2014 LLC v Sequana SA was handed down on 5 October 2022.

The Supreme Court considered the circumstances in which company directors must exercise their duties under s.172 Companies Act 2006 (CA06) with regard to the interests of the creditors and affirmed the position reached by the Court of Appeal. 

Comment

 The Judgment underlines that the significant question faced by directors of whether (and when) they must exercise their duties with regard to the interests of creditors, and how that should be done, remains something on which they should take legal advice.   There is no one definitive "trigger point" for that and directors will need to consider the exercise of their duties in the wider context of the company's then position and its future prospects.

It is also clear that there are also circumstances where the interests of both creditors and other stakeholders will need to be considered at the same time and balanced against each other.

In practice, directors of distressed companies should take early advice from legal and financial professionals to understand their duties and ensure compliance with them. 

Background – Court of Appeal decision

 The Court of Appeal had decided, amongst other things, that directors must exercise their duties with regard to the interests of creditors from the point at which they know or should have known that a company is or is likely to become insolvent.  In that context “likely” means “probable” or in simple terms a greater than 50% prospect. 

Supreme Court Judgment

The Supreme Court outlined four issues which it considered when making the Judgment which included the following:

Is there a common law creditor duty at all?

 The Supreme Court held that there was a creditor duty that is supported by case law and s.172(3) CA06.  The Supreme Court noted that a creditor's economic interest increases when a company is insolvent or nearing insolvency; at which point, a director should take that interest into account and avoid prejudicing it.  

What is the creditor duty?

 In its Judgment, the Supreme Court confirmed that: 

"Where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration, the directors’ fiduciary duty to act in the company’s interests has to reflect the fact that both the shareholders and the creditors have an interest in the company’s affairs. In those circumstances, the directors should have regard to the interests of the company’s general body of creditors, as well as to the interests of the general body of shareholders, and act accordingly. Where their interests are in conflict, a balancing exercise will be necessary."

Once an insolvency process is inevitable the interests of creditors will be paramount as they will have the sole economic interest in the company.

When is the creditor duty engaged? Was it engaged on the facts of this case?

The Supreme Court held that the duty to consider creditors' interests arises when directors know, or should know, that the company is insolvent or bordering on insolvency or that insolvent liquidation or administration is probable. It is not enough that insolvency itself, from which the company might recover, is probable.

However, although touched upon by the minority, the Court have left open the question of whether it is essential that the directors know or ought to know that the company is insolvent or bordering on insolvency or that an insolvency process is probable.