BTI 2014 LLC v Sequana SA and others

The Supreme Court held that English law recognises the rule in West Mercia that, in certain circumstances, the company’s interests for the purposes of the directors’ fiduciary duty are to be understood as including the interests of its creditors as a body. Section 172(3) of the Companies Act 2006 preserves any rule of law requiring directors in certain circumstances to consider or act in creditors’ interests, and therefore does not abolish the West Mercia principle.

However, the Court unanimously concluded that the West Mercia rule is not engaged merely because the company faces a real but not remote risk of insolvency at some point in the future. The modified duty requires directors to have regard to creditors’ interests as the company approaches or enters insolvency, with the weight to be given to those interests increasing as insolvency becomes more likely; only where insolvency (eg an irretrievable insolvent liquidation or administration) is inevitable do creditors’ interests predominate entirely.

The claim failed on the facts because the company was solvent at the time of the dividend and the West Mercia rule did not apply: the appeal was dismissed.

This appeal concerned whether directors owe a duty, preserved by section 172(3) Companies Act 2006, to consider or act in the interests of creditors when a company is solvent but faces a real risk of future insolvency, and whether that duty applied to a lawful dividend payment.

Background and parties:

• Appellant: BTI 2014 LLC, assignee of a company’s claim.
• Respondents: Sequana SA (parent and sole shareholder), and the directors who authorised a large dividend payment in May 2009.
• Facts: A UK subsidiary (AWA) paid a substantial dividend to its parent in 2009; at the time AWA complied with Part 23 distributions and was solvent on cash-flow and balance-sheet tests, but it carried uncertain long-term environmental liabilities giving rise to a real (but not probable or imminent) risk of future insolvency; AWA later entered insolvent administration nearly ten years later.

Relief sought: The appellant (as assignee) sought equitable relief against the directors for breach of duty equivalent to the dividend amount, alleging failure to have regard to creditors’ interests when declaring the dividend.

Issues framed by the Court:

1. Whether there is a common-law rule (the rule in West Mercia) that the company’s interests can include the interests of creditors as a body;
2. If so, the content of the duty when that rule applies;
3. The circumstances or trigger for engagement of the rule;
4. Interaction with shareholder authorisation/ratification; and
5. Compatibility with insolvency remedies, notably sections 214 and 239 Insolvency Act 1986, and whether the rule can apply to a lawful dividend.

Court’s reasoning (concise):

• The Court affirmed that West Mercia is a recognised principle of the common law and that section 172(3) preserved any such rule of law; the directors’ fiduciary duty remains a duty to the company but the meaning of the company’s interests is modified in certain circumstances to include the interests of creditors as a body.
• The content of the duty is not a separate duty owed to creditors; rather it modifies the directors’ duty to the company so directors must consider creditors’ interests alongside members’ interests and refrain from conduct that prejudices creditors; the relative weight shifts towards creditors as insolvency becomes more likely, and when insolvent liquidation or administration is inevitable shareholders’ interests fall away.
• The rule is not triggered merely by a real but not remote risk of insolvency. The Court rejected the appellant’s proposed test that real risk suffices. Triggers properly include insolvency or being "insolvent or bordering on insolvency" or where an insolvent liquidation or administration is probable or inevitable. The Court emphasised the need for a workable, principled threshold and for coherence with insolvency law.
• Shareholder authorisation or unanimous consent cannot authorize conduct that would jeopardise solvency or prejudice creditors once the rule applies; the Duomatic/ratification principles are subject to the same qualification.
• The Court found no incompatibility between the West Mercia rule and statutory insolvency remedies such as sections 214 (wrongful trading) and 239 (preferences), because they occupy different legal space and have different triggers, contents and remedies.

Disposition: The Court unanimously dismissed the appeal because the West Mercia rule did not apply on the facts: the company was solvent and the more stringent threshold for engaging the duty was not met.

Appeal dismissed. The Supreme Court held that the common-law rule in West Mercia — that, in certain circumstances, the company’s interests for the directors’ fiduciary duty include the interests of its creditors as a body — is preserved by section 172(3) Companies Act 2006. The rule, however, is not engaged merely by a real but not remote risk of future insolvency; it applies when the company is insolvent or bordering on insolvency, or when administration or insolvent liquidation is probable or inevitable. On the facts the rule did not apply and the claim failed.

Appeal from the Court of Appeal ([2019] EWCA Civ 112) and the decision of the High Court (trial before Rose J). The Court of Appeal dismissed the claimant’s appeal; the Supreme Court likewise dismissed the appeal.