BTI 2014 LLC v Sequana SA and others

A director does not owe a separate duty to creditors. The fiduciary duty remains owed to the company, but the company’s interests extend to the general body of creditors when insolvency is imminent or an insolvent liquidation or administration is probable. Creditors’ interests then receive increasing weight as the company’s financial position worsens. They become paramount when insolvent liquidation or administration is inevitable.

A real and not remote risk of future insolvency does not engage this rule. Section 172(3) of the Companies Act 2006 preserves the common law rule. Compliance with Part 23 does not prevent the rule from applying to a dividend.

BTI 2014 LLC v Sequana SA and others concerned a €135m dividend paid by AWA to its sole shareholder while AWA was solvent. AWA had substantial but uncertain environmental liabilities, creating a real risk, though not a probability, of insolvency in the medium or long term. It entered insolvent administration almost ten years later.

BTI, as assignee of AWA’s claim, alleged that the directors had breached their fiduciary duty by failing to consider creditors’ interests. Rose J dismissed that claim. The Court of Appeal dismissed BTI’s appeal in [2019] EWCA Civ 112, holding that a real risk of insolvency was insufficient, although a lawful dividend could in principle breach the duty.

The central questions were whether the common law recognises a rule requiring consideration of creditors’ interests, when that rule is engaged, what it requires, and whether it can apply to a dividend complying with Part 23 of the Companies Act 2006.

1. Appeal dismissed unanimously. All five Justices held that a real and not remote risk of future insolvency did not engage the rule associated with West Mercia Safetywear Ltd v Dodd [1988] BCLC 250. AWA was solvent when the dividend was paid. Insolvency was neither imminent nor probable. The directors therefore owed no duty at that time to consider creditors’ interests as a distinct component of the company’s interests.

2. Lord Reed, Lord Briggs, Lord Hodge and Lord Kitchin agreed in substance that English law recognises the rule in West Mercia Safetywear Ltd v Dodd. It creates no separate duty owed to creditors. It modifies the fiduciary duty owed to the company by extending the interests which directors must consider to include those of the general body of creditors. Section 172(3) of the Companies Act 2006 preserves that common law rule.

3. The rule is founded on the creditors’ increasing economic interest in a financially distressed company, rather than any transfer to them of a proprietary or quasi-proprietary interest in its assets. The majority rejected a trigger based merely on a real risk of insolvency. Lord Briggs, with Lord Kitchin and Lord Hodge, considered that imminent insolvency known or reasonably knowable to the directors, or a known or reasonably knowable probability of insolvent liquidation or administration, would suffice. Lord Reed regarded insolvency, bordering on insolvency, or probable insolvent liquidation or administration as sufficient, but left the knowledge requirement open.

4. Before insolvent liquidation or administration becomes inevitable, directors must consider creditors’ interests, give them appropriate weight and balance them against shareholders’ interests where they conflict. The weight due to creditors increases as the company’s position deteriorates. Once insolvent liquidation or administration is inevitable, shareholders cease to retain a valuable economic interest and creditors’ interests become paramount. This guidance was not necessary to the disposition.

5. The rule can apply to a dividend which otherwise complies with Part 23 of the Companies Act 2006. Section 851(1) preserves other rules of law restricting distributions. Compliance with the statutory accounts-based regime therefore does not authorise directors to make a distribution in breach of their fiduciary duty.

6. The rule is compatible with sections 214 and 239 of the Insolvency Act 1986. Those provisions have different triggers, standards, procedures and remedies. Shareholders also cannot authorise or ratify conduct which breaches the duty once creditors’ interests have become part of the company’s interests.

7. Lady Arden agreed that the appeal should be dismissed and that the rule exists. She would formulate its earlier stage as a duty to consider creditors’ interests and avoid materially harming them. In her view, creditors’ interests displace shareholders’ interests only when insolvency has become irreversible and a formal insolvency procedure is unavoidable.

1. United Kingdom Supreme Court: The appeal was dismissed unanimously in BTI 2014 LLC v Sequana SA and others [2022] UKSC 25.
2. Court of Appeal: The court dismissed BTI’s appeal in [2019] EWCA Civ 112. It held that a real risk of insolvency was insufficient to engage the duty, although the duty could apply to an otherwise lawful dividend.
3. High Court: Rose J dismissed the assigned claim against the directors because AWA was not insolvent, bordering on insolvency or likely to become insolvent when the dividend was paid. A separate claim under section 423 of the Insolvency Act 1986 succeeded. The High Court citation is not stated in the judgment.