Directors’ Duties in an Insolvency Context: Where Creditor and Shareholder Interests Collide

UK Supreme Court gives important judgment on directors’ “creditor duty”

The UK Supreme Court in BTI 2014 LLC v Sequana SA and ors [2022] UKSC 25[1] has given an important judgment clarifying the nature of the so-called “creditor duty.”  The “creditor duty” is an aspect of the fiduciary duty of directors to act in the interests of their company which requires the directors to take into account the interests of creditors in an insolvency, or borderline insolvency, context.

The creditor duty is a relatively recent development in English common law[2] and Sequana now confirms beyond any doubt that the duty exists. The decision’s greater significance, however, may come from the guidance it provides directors and insolvency practitioners on how close to insolvency the company needs to be for the duty to be engaged.  That is a difficult issue that has received conflicting attention in the case law and presents a potentially wide margin for error for directors.

It is now clear from Sequana that the ‘creditor duty’ is engaged only when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. It remains to be seen whether that still rather general test will in fact provide directors with greater comfort in practice.

To continue reading our perspective on the case from partners Jonathan Swil and Alexander Wood, counsel Michael Scargill and associates James Matthews and Chris Collins, click here.