Directors’ duties to creditors in insolvency situations: BTI v Sequana

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The Supreme Court has made a ruling in the case of BTI 2014 LLC v Sequana SA [2022] UKSC 25 which clarifies company directors’ duties to creditors in situations where there is risk of insolvency. The BTI case was in relation to a dividend payment in the sum of €135 million to Arjo Wiggins Appleton’s sole shareholder, Sequana in a situation where there was a risk of insolvency.

A five-judge bench at the Supreme Court upheld the Court of Appeal decision that there was no breach of duty in Appleton’s directors in making the dividend payment.

Some of the main points to come out of the judgment include:

 

  • Directors have a duty under s 172(3) of the Companies Act 2006 to have regard to the interests of company creditors.
  • This duty forms part of a director’s fiduciary duty to act in good faith for the benefit of the business. The interests of the company’s’ creditors forms part of the “interests of the company” when the duty is triggered.
  • A “real risk of insolvency” is not enough to trigger this duty, it will only be engaged when the company is insolvent or very close to insolvency. The duty may arise before insolvency and the Court has suggested that it may arise when the directors know or ought to know about a situation of imminent insolvency.
  • In situations of insolvency or if a company is bordering on insolvency, but liquidation or administration are not inevitable, directors are required to consider the interests of creditors as a whole, balanced against the conflicting interests of shareholders; and therefore, the interests of creditors may not be the main priority.
  • The interests of creditors will become paramount in situations where administration or liquidation is inevitable as the shareholder’s economic interests in the company will have come to an end at this point.

It will come as a relief to company directors that the Court has clarified that the duty to creditors is not engaged in situations where there is only a risk of insolvency. This decision, therefore, reduces the scope of personal liabilities for directors of companies experiencing distress.

The outcome of this judgment will shape common law as well as UK insolvency law for many years to come. It provides welcome clarification on directors’ duties to creditors in these situations, and how they should be advised.

This is still a very challenging and complex matter, with severe consequences for getting it wrong. It is therefore, vital to seek the right advice as early as possible when facing financial issues.

Avoiding a distressed situation

Finance monitoring: Close monitoring of a company’s financial position will help to avoid a distressed situation in the first place; it can ensure the company is well equipped to respond and adapt to periods of uncertainty, as well as changing demands from stakeholders.

Getting the right advice: Obtaining the right financial advice is key to avoiding a distressed situation in the first place. In periods of financial stress, advice should be sought as early as possible to prevent the situation from worsening. In situations of distress, statutory relief may be granted to directors who have acted reasonably and honestly. Evidence of obtaining and relying upon independent advice could assist in these situations.

Insurance: Unfortunately, not all distressed situations can be avoided, and insolvency is something that many company directors face. Having the right insurance policy in place will limit personal liability for directors.

How Recovery First can assist law firms facing financial difficulties

If your law firm is experiencing financial difficulties, we would recommend that you face these issues as early as possible by seeking the right help and advice. Recovery First work alongside a range of professional advisers such as insolvency practitioners, accountants, merger and acquisition consultants and corporate recovery specialists; we can put you in touch with the right advisers for your unique situation.

We can help your firm avoid a distressed situation in the first place by helping you exit any market so you can focus on more profitable areas of law. Perhaps you wish to free up cash locked up in your work in progress – we can help.

We can also assist firms going through the process of insolvency. The formal insolvency process for solicitors can be a lengthy one and requires liaison with the Solicitors Regulation Authority (SRA), as well as engagement with insolvency lawyers and insolvency practitioners.

Quite often, we are approached by firms facing up to insolvency. We can assist by effecting introductions to appropriate experts, with a proven track record of working with law firms, providing the firm with options on which practitioner to use. It is essential that firms identify practitioners with direct experience of working with law firms, who present unique issues in an insolvency situation,  not least of all client accounting and the SRA.

If appropriate, we will then work closely with the insolvency team to complete a structured and compliant run-off of WIP files. We will aim to recover 100% of the firm’s recoverable WIP value by distributing the files to our panel of solicitors; we have anecdotal evidence of project where recovery of WIP has exceeded 100% of that recorded.

Our team manage the whole process from compliant transfer of files , placing case files with an approved appropriately skilled panel law firm to protect the integrity of the client’s case through to collection and management of costs at conclusion.

If you would like to find out more about Recovery First’s process, feel free to get in touch today with David Johnstone at david.johnstone@recoveryfirst.co.uk, telephone 07887796989 or contact Sally Dunscombe at sally.dunscombe@recoveryfirst.co.uk, telephone 07774205870.

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Sally Dunscombe:

sally.dunscombe@recoveryfirst.co.uk

David Johnstone:

david.johnstone@recoveryfirst.co.uk

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