Update on BTI v Sequana

(4) When the company is insolvent or bordering on insolvency, but liquidation or administration is not inevitable, the “creditor duty” requires the directors to consider creditors’ interests as a whole, and to balance them against shareholders’ conflicting interests by making a commercial judgment about the benefits and risks of a transaction. At this point, creditors’ interests may not always be paramount.

(5) Things are different when an actual insolvent liquidation or administration becomes inevitable. At this time the shareholders’ economic interests in the company come to an end, and creditors’ interests become paramount.

(6) The shareholders cannot ratify transactions in breach of the directors’ duties to take into account the interests of creditors.

Written by Rabin Kok

Yesterday, a five-judge bench of UK Supreme Court handed down the court’s long-awaited, 160-page decision in BTI 2014 LLC v Sequana SA [2022] UKSC 25.

BTI is one of the most important decisions in insolvency and company law ever to reach the UK’s highest court. It is a welcome decision. It clarifies how directors should comply with their duties to creditors, and therefore how they should be advised. It will also shape insolvency law in the UK and across the common-law world for years to come.

BTI was about a €135 million dividend paid by Arjo Wiggins Appleton to its sole shareholder, Sequana. Lord Briggs, writing for the majority, upheld the Court of Appeal’s judgment that the payment did not breach the duties of Appleton’s directors. The key points from his judgment are that:

(1) There is a duty to have regard to the interests of creditors, and that duty is preserved by s 172(3) of the Companies Act 2006.

(2) The duty is a part of the directors’ fiduciary duties to act in good faith for the benefit of the company. It is not a free-standing duty owed to creditors. In essence, when the duty is triggered, the “interests of the company” expand to include the interests of the company’s creditors as a body. The majority called this the “creditor duty”.

(3) The “creditor duty” is triggered when the company is insolvent or bordering on insolvency. A “real risk of insolvency” is not enough. The duty can also arise prior to insolvency. The court left the issue of when the duty arises before an insolvency opens, but the court did suggest that it could be engaged where there is imminent insolvency of which the directors know or ought to know.

Yesterday, a five-judge bench of UK Supreme Court handed down the court’s long-awaited, 160-page decision in BTI 2014 LLC v Sequana SA [2022] UKSC 25.

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