Company directors and their duties

Answer

Introduction

The Supreme Court’s recent judgment in BTI 2014 LLC v Sequana SA and others [2022] considered:

1. whether directors are required to act in the best interests of its company’s creditors; and

2. in what circumstances directors are required to discharge this duty.

Section 172 of the Companies Act 2006 (the act) states:

“A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to –

a. the likely consequences of any decision in the long term,

b. the interests of the company’s employees,

c. the need to foster the company’s business relationships with suppliers, customers and others,

d. the impact of the company’s operations on the community and the environment,

e. the desirability of the company maintaining a reputation for high standards of business conduct, and

f. the need to act fairly as between members of the company.”

Section 172(3) of the act applies section 172(1) to creditors:

“The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.”

Background

The claim arose in respect of two dividends paid by Arjo Wiggins Appleton Limited (AWA) (now, Windward Prospects Limited) to its parent company and sole shareholder, Sequana SA, of €443 million in December 2008 and €135 million in May 2009. At the time the dividend was paid, AWA wasn’t under threat of insolvency judging by its cash flow and balance sheet. However, AWA had long-term pollution-related contingent liabilities of an uncertain amount and an uncertainty as to the value of an insurance portfolio.

AWA went into insolvent administration in October 2018. A claim was brought by BTI (which bought the claim from AWA) for a breach of directors’ duties and seeking recovery of the dividend payments to Sequana.  

Decision

The Supreme Court confirmed that directors must consider the interests of creditors pursuant to section 172(3).  That is triggered when the company is insolvent, or it’s bordering insolvency (and the directors know or ought to know this and this is commercially irreversible). It’s not, however, triggered where there’s simply a risk of insolvency. What this meant in this case is that AWA wasn’t under a duty to consider creditors at the time it paid the dividends, as AWA wasn’t actually or imminently insolvent. 

Impact of the decision

The ruling has been labelled a “momentous decision in company law” around the director’s duties and marks a big step forward in English insolvency law.

Lawyers will need to remind clients who are directors of companies to consider creditors’ interests in times of actual or anticipated financial distress. Where the risk is more than probable, but not yet imminent, directors will need to carry out a balancing exercise, considering the interests of different stakeholders. 

In a time of economic uncertainty, with rising interest rates on facilities and lending arrangements, the risk of insolvency is increased. In the judgment, Lady Arden noted:“[T]he progress towards insolvency may not be linear and may occur not as a result of incremental developments but as a result of something outside the company which has a sudden and major impact on it."

It’s therefore important that directors are aware of this duty. Breach of director duties can result in removal from office, personal liability for damages and even criminal prosecution.

Top tips for aspiring lawyers

It’s helpful to understand the economic climate and the current issues facing businesses and organisations. Useful resources to stay commercially aware include Finimize, City A.M., The Law Society Gazette, The Economist, the Financial Times and LawCareers.Net’s weekly commercial news round-ups.

The term ‘commercial awareness’ can often seem daunting for an aspiring lawyer – what exactly does this mean and how do I develop it? There’s no right answer; however, having empathy and an understanding of who your client is and what their goals and concerns are is a starting point. What might concern a small company may not be of commercial concern to a larger company. Clients will expect you to understand and take into account wider business considerations when working with them.

Asha Patel is a trainee solicitor at Bevan Brittan LLP.