The Supreme Court judgment on Sequana – what it means for directors’ duties

After an almost 18-month period of consideration, the Supreme Court has now delivered its judgment in the case of BTI 2014 LLC v Sequana SA, which centred on the scope of directors’ duties and more specifically, at what stage directors require to consider, or indeed act, in the interests of the company’s creditors.

Background

In May 2009 AWA declared a dividend to Sequana (its sole shareholder), extinguishing a debt which Sequana owed to it. The lawfulness of the dividend was not a question for the Supreme Court as it was established that at the time AWA was both balance sheet and cash flow solvent. 

AWA’s accounts at that time made provision for long-term contingent liabilities, which presented a risk of a future insolvency event.  Given that these liabilities were both long-term and contingent, at the time the dividend was declared, insolvency was neither imminent nor probable.

AWA did go into insolvent administration in October 2018, nearly 10 years later and BTI (as assignee of AWA's claims) raised an action against the directors of AWA seeking to recover the value of the dividend to Sequana.  BTI arguing that the decision to issue the dividend was taken in breach of their duties to the creditors of AWA.

The Court of Appeal affirmed the High Court’s decision that the creditor duty does not arise until a company is either: insolvent; on the brink of insolvency; or its insolvency is probable.

The Supreme Court's decision

The Supreme Court dismissed BTI’s appeal, reaffirming that directors should only prioritise the interests of creditors when they know, or ought to know, that: (a) the company is insolvent; or (b) the company is bordering on insolvency; or (c) that an insolvent liquidation or administration is probable.

The Supreme Court has confirmed that directors’ duty to consider and give weight to the interests of creditors versus those of the members and other stakeholders depends on the particular circumstances of the company from time to time.  When insolvency is inevitable it is only then that the creditors’ interests become paramount.

What does this mean in practical terms?

In practical terms, there is a sliding scale where directors will require to be alive to the evolving circumstances of the company and have regard to the interests of the creditor at an earlier stage than had previously been the case. Depending on where they are on the scale, they will continue to have a duty to promote the success of the company for the benefit of its members. 

What steps should directors take?

The Supreme Court’s decision emphasises the importance of monitoring the company's financial health. In practice, it is often difficult to establish the exact point at which a company is nearing insolvency.

Here are some practical measures directors can take:

• Take appropriate legal and financial advice in assessing the company’s financial position and in considering contingency plans where necessary.
• Maintain up-to-date reliable financial information and don’t rely on outdated accounts.  Consider putting in place monthly or quarterly management accounts and operational reporting measures.
• Hold regular board meetings to consider the company’s current financial position and keep detailed minutes of matters discussed and decisions taken.
• Regularly assess and review all contracts with creditors, identifying the nature and extent of those liabilities and financial plans for the company to ensure sufficient liquidity as debts fall due.
• Refrain from taking an overly-cautious approach. By prioritising the interests of creditors at an early stage prior to insolvency, directors may act defensively and divert their obligations, causing existing shareholders to become concerned.
• Where there is a group structure, consider and manage potential conflicts of interest on an ongoing basis.
• Maintain regular communication with lenders and any other interested party to ensure, as far as is possible, a level of support is maintained.
• Where you find yourself prioritising payments consider your obligations to the other creditors and set out in writing the consideration given and how you have arrived at the decisions made.
• Regularly assess the need to take specialist advice on any matters under consideration.