The Supreme Court’s decision for the case of BTI 2014 LLC v Sequana provides useful guidance for company directors when their company is facing or is likely to face financial difficulty in the future.
The judgement highlights circumstances where company directors must think about the interests of their creditors and how this should be done.
Facts of the case
The directors of Intellectual Property Rights law firm AWA paid a €135 million dividend to their only shareholder Sequana in May 2009 (the May dividend). AWA was debt-free at the time the May dividend was paid. However, there was a real risk that AWA may face financial difficulty in the future as there was uncertainty surrounding both the amount of debt they had and the value of some of their assets. AWA did eventually go on to become insolvent in October 2018.
BTI 2014 LLC was appointed as the representative of AWA’s claims. BTI sought to recover the amount of the ‘May dividend’ from AWA’s directors because the directors breached the creditor duty.
They argued that the directors failed to consider the creditor’s interests when they decided to pay the May dividend to their shareholders. This claim was rejected by both the High Court, the Court of Appeal and the Supreme Court (SC). It was decided that while there was a real risk that AWA might experience financial difficulty in future, the risk alone (even if it was a real risk) was insufficient.
A breakdown of the Supreme Court’s (SC) decision
The SC stated that the creditor duty did not apply to the facts of this case. They noted that a real risk of insolvency was not sufficient to trigger the creditor duty. Rather, the creditor duty arises when the directors know or should know that the company is or is likely to become insolvent. The majority of the court held that the assessment of the duty should be based on what the directors know or ought to know about the company’s finances.
What does this decision mean?
Based on the above analysis, we can conclude that the creditor duty is triggered when a company is insolvent or bordering on insolvency. It is therefore important for directors to be aware of the company’s financial position at all times and to make it best practice to review and consider the company’s finances.
It will no doubt be challenging for directors to navigate the challenges facing businesses while complying with their own duties and keeping track of the company’s financial position.
Directors are urged to seek professional advice if their company faces financial difficulty or is likely to face financial difficulty in future to ensure that they are doing everything they can to protect both themselves and the company.
For further information or advice on this, please contact Nick Attwell in the Commercial Team at 01473 229200 or firstname.lastname@example.org