In brief
The UK Supreme Court has handed down its long-awaited judgment in relation to the case of BTI 2014 LLC (Appellant) v. Sequana SA and others (Respondents) [2022] UKSC 25, concerning the duty of directors of a company registered under the Companies Act 2006 to consider (and act in accordance with) the interests of the company’s creditors.
Directors’ duties: existing framework
Before this judgment was handed down, the general consensus was as follows:
- Where a company is insolvent, the duty of its directors to act in the way they consider, in good faith, would be most likely to promote the success of the company in the interests of its members as a whole (as codified in Section 172(1) of the Companies Act 2006) is immediately and automatically altered such that directors should treat creditors’ interests as paramount (that is, in priority to shareholders’ interests). Directors must consider the interests of creditors as a whole, and not just the interests of any individual creditor or class of creditors.
- The duty to consider or act in the interests of creditors arises when the directors knew, or should have known, that the company was (or was likely to become) insolvent.
It is not always clear whether a company is solvent or when it becomes insolvent (as that concept is defined in applicable legislation). The period in which a company’s solvency is uncertain is commonly referred to as the “zone of insolvency”, during which time directors may find it difficult to know whether to prioritise the interests of the company’s members or whether their focus must shift to acting in the best interests of its creditors.
The Supreme Court’s judgment in this case has confirmed and developed that understanding, as set out below.
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