Directors Duties To Creditors

BTI 2014 LLC v Sequana SA 2019

This case addresses the thorny issue of when a director’s duty to have regard to the interests of creditors is triggered.

The Sequana SA caused its subsidiary to declare it a dividend, which it set off against the inter company account. At the time the subsidiary was not trading but was running off an indemnity liability. A claim was brought under section 423 IA86 that the payment was in defraud of creditors. A separate claim was also brought that the dividend was in breach of the director’s duties to creditors under s172(3) CA 2006. (An illegal dividend claim was not perused on appeal).

The Court of Appeal found the dividend could fall within s423 even though there was no “dealing” between the parties. This part of the appeal was, therefore, dismissed. The Court found, however, that the directors did not breach their common law duties as set out in s172(3). On the facts the directors had obtained a valuation for the indemnity liability and based their decision upon this valuation, which seems entirely reasonable.

The Court looked at when the duty might be triggered. The Court found that the duty is triggered when the directors knew or ought to have known that the company is likely to be insolvent, where likely means probably. Not any lower test, such as that used in deciding upon an administration application. Therefore, the test is not triggered when the company becomes insolvent but rather when this is likely/probable.

The Court made it clear that the test is a stringent one and is very much fact dependent. It is also complicated by other factors such as:

  • The definition of insolvency, which was not addressed. Is it the balance sheet or cashflow test. The inability to pay debts as and when they fall due is itself subject to those falling due in the reasonably near future, so this test is not precise either.
  • Furthermore, the courts are sensitive to being overly critical of directors decisions when being judged with the benefit of hindsight. The subjective and objective nature of directors duties and what a director ought reasonably to have known.
  • The Court also failed to address the nature of the duty to creditors in the period between likely and actually insolvent. Were the creditors interests paramount in this period or is there a sliding scale.

In my recent experience it has become popular for allegations of breaches of duty to be made prior to actual insolvency, it is clear that this is possible but should only be done in very specific circumstances and with a high degree of evidence to support any claim. Too often such claim are made without sufficient evidence or in circumstances where there is no real need to.

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