BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25

AWA Ltd paid a dividend to its parent company Sequana SA when solvent but facing a real risk of future insolvency due to uncertain environmental liabilities. The Supreme Court held that directors have a duty to consider creditor interests when a company is insolvent or bordering on insolvency, but not merely when there is a real risk of future insolvency. The appeal was dismissed.

Facts

AWA Ltd, a UK company, paid a dividend of approximately £135 million to its sole shareholder, Sequana SA, in May 2009. The dividend complied with the statutory requirements in Part 23 of the Companies Act 2006 and the common law rules on capital maintenance. At the time of payment, AWA was solvent on both balance sheet and cash flow bases. However, AWA had long-term environmental liabilities of uncertain amount relating to pollution clean-up costs, which created a real risk (though not a probability) that AWA might become insolvent at some uncertain future date. AWA went into insolvent administration almost ten years later in October 2018.

BTI 2014 LLC, as assignee of AWA’s claims, sought to recover from AWA’s directors on the basis that their decision to pay the dividend was a breach of duty to consider creditor interests.

Issues

The main issues before the Supreme Court were:

1. Existence of Creditor Duty

Whether there exists a rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors when exercising their duties to the company.

2. Trigger Point

If such a duty exists, whether it is engaged when there is merely a real and not remote risk of insolvency at some point in the future.

3. Content of the Duty

What the content of any such duty would be.

4. Application to Lawful Dividends

Whether the duty can apply to a decision to pay a dividend which is otherwise lawful.

Judgment

The Supreme Court unanimously dismissed the appeal, holding that while a creditor duty exists, it was not engaged on the facts of this case.

Existence of the Duty

Lord Reed, giving the leading judgment, confirmed that English law recognises what he termed ‘the rule in West Mercia’. This rule modifies the directors’ fiduciary duty to act in good faith in the interests of the company. Lord Reed stated:

There is a rule which modifies the ordinary rule whereby, for the purposes of the directors’ fiduciary duty to act in good faith in the interests of the company, the company’s interests are taken to be equivalent to the interests of its members as a whole.

The duty is preserved by section 172(3) of the Companies Act 2006, which provides that the duty to promote the success of the company has effect subject to any rule of law requiring directors to consider or act in creditors’ interests.

Content of the Duty

The Court held that where the rule applies, directors must consider creditors’ interests alongside those of shareholders. Lord Reed explained:

Where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration, the directors’ fiduciary duty to act in the company’s interests has to reflect the fact that both the shareholders and the creditors have an interest in the company’s affairs.

The weight given to creditors’ interests increases as the company’s financial difficulties become more serious. Only when insolvent liquidation or administration is inevitable do shareholders’ interests fall away entirely.

Trigger Point

The Court rejected the appellant’s argument that a real risk of insolvency is sufficient to engage the duty. Lord Reed held:

I am satisfied that the rule in West Mercia does not apply merely because the company is at a real and not remote risk of insolvency at some point in the future.

Lord Briggs formulated the trigger as either imminent insolvency or the probability of an insolvent liquidation or administration about which directors know or ought to know.

Relationship with Statutory Provisions

The Court considered the relationship between the common law duty and section 214 of the Insolvency Act 1986 (wrongful trading). The duties were found to be compatible: the common law duty applies at an earlier stage and with different content from the statutory wrongful trading provisions.

Implications

This judgment provides the first authoritative Supreme Court guidance on directors’ duties to creditors. Key implications include:

1. Directors of solvent companies need not consider creditor interests as a distinct factor when making business decisions.

2. The duty is engaged when a company is insolvent, bordering on insolvency, or when insolvent liquidation/administration is probable.

3. A mere real risk of future insolvency is insufficient to trigger the duty.

4. The duty does not create a separate obligation owed to creditors; it modifies how the company’s interests are understood for purposes of directors’ fiduciary duties.

5. Compliance with Part 23 dividend rules does not necessarily immunise directors from liability if the creditor duty is engaged.

The decision provides important guidance for directors of financially distressed companies while preserving scope for commercial judgment and corporate rescue efforts.

Verdict: Appeal dismissed. The creditor duty was not engaged because AWA was solvent at the time of the dividend and there was only a real risk of future insolvency, which is insufficient to trigger the duty. The duty requires insolvency, bordering on insolvency, or probable insolvent liquidation/administration.

Source: BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25