BTI v Sequana: Impact on directors’ duties to creditors

BTI v Sequana: Impact on directors’ duties to creditors

By Jennifer Haworth and Dan Griffin

The UK Supreme Court delivered the much anticipated BTI 2014 LLC v Sequana SA [2022] UKSC 25 decision in October 2022, clarifying the duty of company directors to creditors when facing insolvency. Given that there is no directly equivalent authority in Bermuda on the duty of directors to act in the best interest of the company under section 97 of the Companies Act 1981, it is expected that the ruling will be highly persuasive in the Bermuda courts.

In English law, company directors have a common law duty to the company’s creditors. When facing insolvency or on the brink of insolvency, they must consider and give appropriate weight to creditor interests. This is a fiduciary duty which is owed to the company rather than creditors directly and is expressly preserved by section 172(3)of the UK Companies Act 2006.

The duty to act in the interests of creditors (rather than shareholders) is a primary concern when directors know or ought to know that either the company is insolvent, insolvency is imminent, or that administration or liquidation is likely. As a consequence an otherwise lawful distribution to shareholders could be in breach of this duty to creditors.

Sequana was a company which entered insolvency in 2018. However, 10 years earlier the directors of the company had declared a dividend of EUR 135,000,000 to its shareholders. BTI was a creditor of Sequana and brought a claim against the directors on the basis they had breached the creditor duty. Sequana argued that the creditor duty formed no part of English law, alternatively the payment of a lawful dividend was not within the scope of the duty or the duty was triggered only when a company was actually insolvent or where insolvency was both probable and imminent or more likely than not.

The UK Supreme Court held that creditor duty did exist but that the directors had not breached it because the risk of insolvency was too remote. However, it went on to make important comments clarifying when the creditor duty arises and in each case, the weight to be given to creditors’ interest.

The UK Supreme Court held that the duty arises firstly when the company is insolvent or bordering on insolvency, using the words “imminent insolvency”, meaning an insolvency which the directors know or ought to know is just about to happen but not when the company is facing inevitable liquidation or administration. At this point, the directors must give weight to creditors’ interests and may balance them against shareholders’ interests. This may mean subordinating shareholders’ interests to those of creditors.

Secondly, the UK Supreme Court said the duty arises when an insolvent liquidation or administration is probable and in these circumstances creditors’ interests are paramount, i.e. they take precedence over shareholders’ interests because at that point shareholders no longer have a valuable interest in the company.

Bermuda’s section 54 of the Companies Act 1981 already includes a prohibition on declaring a dividend in circumstances where the company is, or would after the payment be, unable to pay its liabilities as they become due, or the realisable value of the company’s assets would thereby be less than its liabilities. Furthermore, in Re First Virginia Reinsurance Ltd. [2003] Bda LR 47, the Court held that the duty to act in the best interests of the company under section 97 of the Companies Act 1981 included considering creditors’ interests and the case has been widely applied since.

BTI v Sequana is therefore likely to be most relevant to understanding at what time the duty to creditors is engaged, creating the prospect of a duty which arises when the directors ought to have known insolvency was about to happen. We expect to see BTI v Sequana considered and applied by the Bermuda courts in the near future.