Directors’ duties and walking a corporate tight rope
At a time when many companies are facing financial difficulties and directors are considering their legal duties, the Supreme Court has now handed down its long-awaited judgment in the decision of BTI 2014 LLC v Sequana SA and others [2022] UKSC 25. It clarifies the scope of directors’ duties in circumstances where a company is in financial difficulty, often referred to as the “twilight zone” i.e. the company is not yet insolvent, but the company’s financial position is precarious.
All members of the Court agreed that, where an insolvent Liquidation or Administration is “inevitable” the creditors’ interests become paramount, the shareholders ceasing to retain any valuable interest in the company.
What is the scope of the creditors’ interest duty?
This ‘creditors’ interest duty’, stems from the long-established fiduciary duty of a director to act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole (as codified by section 172(1) of the Companies Act 2006).
However, there is a common law rule (by section 172(3)) that this duty is modified in certain circumstances, namely the company’s possible onset of insolvency and the interests of its creditors.
The Supreme Court held that it is a balancing exercise between the interests of shareholders and creditors which works on the basis of a sliding scale. In a nutshell, creditors’ interests will become increasingly important the closer the company gets to the point of insolvency, until insolvency is inevitable, at which point their interest becomes paramount.
The Supreme Court recognised that the decision making of directors in these circumstances would be heavily fact sensitive and must reflect the reality of what is happening on the ground. Each situation will be judged on its own unique facts.
What does this all mean for directors?
The decision still leaves directors personally vulnerable to personal liability in the wrong circumstances.
On a practical level, during times of financial difficulty, directors should:
- ensure they are kept abreast of the company’s financial position
- have their legal duties at the forefront of their minds
- be conscious of making factual statements to creditors about the solvency position of the company
- ensure that Board meetings at which the company’s financial position is discussed are accurately recorded in writing
- seek professional advice early to support the board’s understanding of its duties and assist with the assessment of the financial position and trading decisions made in consequence.
For further information on this topic or on any other legal area, please contact John Szepietowski or Kay Stewart at Audley Chaucer Solicitors on 01372 303444 or email admin@audleychaucer.com or visit our Linkedin page.
John Szepietowski
This information was correct as at July 2022