The Supreme Court considered directors’ duties under s.172 Companies Act 2006 and whether the trigger for the directors’ duty to consider creditors is merely a real risk of, as opposed to a probability of or close proximity to, insolvency. In doing so, the Court considered the existence and engagement of the so-called ‘creditor duty’.
Creditors always have an economic interest in the company’s assets, although this interest increases as the company approaches insolvency or enters it. This is because, upon insolvency, creditors will have the main economic interest in the company. The creditor duty has been defined as ‘the duty of company directors to consider, or to act in accordance with, the interests of the company’s creditors when the company becomes insolvent, or when it approaches, or is at real risk of, insolvency’. The question for the Court was whether the company was in fact insolvent, or at a real risk of becoming insolvent.
In May 2009, the directors of a company called AWA distributed a dividend of €135 million to its only shareholder, Sequana SA. The significance of this was that it removed almost the whole of a debt which Sequana owed. However, at the time of this payment, AWA was solvent on both a balance sheet and cash flow basis (these are typical ways of determining whether a company is solvent or not). Despite this, their long-term liabilities of uncertain amounts meant there was a real risk that they might become insolvent in the future, though this risk was not ‘probable’. AWA did enter insolvent administration nearly 10 years later, in October 2018. BTI sought to recover the amount of the payment from AWA’s directors.
Supreme Court Decision
The Supreme Court held that there is a creditor duty supported by case law and s.172(3) Companies Act 2006. S.172(3) states that, when exercising their duties under s.172(1) (to promote the success of the company), directors must consider or act in the interests of the creditors of the company. However, because AWA were not insolvent at the time of the payment to Sequana SA in May 2009, and insolvency was not probable (less than a 50% prospect), the creditor duty was not engaged.
There remains to be a definitive point in which directors should exercise their duties with regard to the interests of creditors. Consequently, directors who are concerned that their company may be approaching insolvency should seek legal advice at the earliest opportunity in order to understand their position and responsibilities.
For further information on this topic or on any other legal area, please contact John Szepietowski or Kay Stewart at Audley Chaucer Solicitors on 01372 303444 or email firstname.lastname@example.org or visit our Linkedin page.
This information was correct as at October 2022