When is the Creditors Interests Duty of Directors Triggered?
Directors would do well to understand their duties towards the interests of their creditors if they are in financial straits in light of useful guidance from the court. It is important to note that even if the company is not yet insolvent, their duty towards creditors could be triggered.
A significant ruling clarifies s172 Companies Act 2006 and the duty in common law to consider the interests of creditors in certain circumstances.
What is the creditors’ interests duty?
In some situations, where the interests of shareholders may clearly conflict with those of creditors, s643 Companies Act 2006 sets out special provisions for the protection of creditors’ interests. One of those relates to a reduction of share capital without court approval. In that situation, the directors must make a solvency statement no more than 15 days before authorising the reduction by special resolution.
In this case, the court made clear that the creditors’ interests duty may be triggered when a company's circumstances fall short of actual, established insolvency.
What happened?
The directors signed a solvency statement which stated that they were of the opinion that there was no ground on which the company could then be found to be unable to pay (or otherwise discharge) its debts. A special resolution was then passed to reduce the company’s share capital; and interim dividends were paid to the parent company by way of set-off in relation to a debt owed by the parent.
The company brought proceedings against the directors, arguing that the directors did not have the right to sign the solvency statement and the share reduction and dividend payments were unlawful. One of the issues for the court was whether the directors’ duty to have regard to and act in the interests of the company’s creditors under s172(3) had arisen.
The company argued (unsuccessfully) that directors owe a duty to consider the interests of creditors in any case where a proposal involves a real, as opposed to a remote, risk to creditors. But this, said the Court, would be a new test, “not anchored to the quasi-proprietary interests of creditors in the assets of an insolvent company”. It is a test that would have a “chilling effect on entrepreneurial activity, when such activity is the underlying purpose of most registered companies”.
The Court went on to clarify that the s172(3) duty may be triggered when a company's circumstances fall short of actual, established insolvency. When the duty is engaged, an important issue is whether their interests are paramount or are to be considered, but this is not straightforward and will depend on the facts. However, where the directors know or ought to know that the company is presently and actually insolvent, the Court said “it is hard to see that creditors' interests could be anything but paramount”.
Once the directors are duty bound to have regard to the interests of creditors, a breach of that duty will entitle the company to compensation for the losses caused to the company.
1BTI 2014 LLC v Sequana S.A. & Ors [2019] EWCA Civ 112
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