07 October 2022

The Supreme Court has been given its first opportunity to “address the existence, scope and engagement of an alleged duty of company directors to consider, or to act in accordance with, the interests of the company’s creditors when the company becomes insolvent, or when it approaches, or is at real risk of, insolvency”. The corporate restructuring and insolvency community has been waiting for this “momentous” judgment with anticipation for the last 17 months.

The facts of the case:

For a full description of the facts of the High Court case and the dismissal by the Court of Appeal, please see our article published on 11 November 2016 and our article published on 11 February 2019 respectively. By way of a reminder, the Court of Appeal concluded that the 'creditors’ interest duty' may be triggered when a company’s circumstances 'fall short of actual, established insolvency' thereby upholding the High Court’s rejection of BTI’s case that the applicable trigger was the earlier 'real, as opposed to a remote risk of insolvency'.

The Supreme Court dismissed BTI’s appeal relating to this creditor duty by holding that the duty is triggered when the directors know, or ought to know, that the company is insolvent or bordering insolvency, or that an insolvent liquidation or administration is probable.

Whilst all members of the Supreme Court agreed that the appeal should be dismissed, there are some interesting nuances in their reasoning that will no doubt be unpicked in detail over time.

When and to what extent must directors consider the interests of creditors?

Our corporate restructuring and insolvency team is regularly engaged to advise management boards on their duties during times of financial stress and distress. This is often a complex and stressful time for directors and should involve a careful balancing act supported by specialist financial and legal advice.

The core question that we are regularly asked is whether or not the relevant “trigger point” has arisen i.e. the point in time when the directors’ normal fiduciary duty to act in good faith in the interests of the company for the benefit of its members as a whole can be subject to a modification to include the interests of the company’s creditors.

The answer to this question is always critical to the restructuring strategy, which is why we welcome the following conclusions:

  • It is crucial for directors to remain informed about the financial position of the company as the road to insolvency is not always linear. Passivity is not acceptable.
  • The interests of the members as against those of the creditors during times of financial difficulty can be considered in terms of a sliding scale: the greater the financial difficulties, the more the directors are expected to prioritise the creditors’ interests.
  • Where insolvency becomes inevitable, the interests of the creditors become of paramount importance.

What does this mean for directors?

This long-awaited judgment has provided helpful guidance for directors regarding the point at which the creditors’ interest duty is triggered, confirming it is probability, rather than a mere risk of insolvency, that is key. Whilst this is reassuring for directors, the judgment also stressed the importance of avoiding passivity when acting as director, as the duties owed to shareholders and creditors operate on a variable sliding scale directly linked to the financial position of the company.

The judgment has provided additional guidance but this is still a highly complex area of law and the stakes can be high for directors who fail to take appropriate advice during times of financial stress and distress.

For more information on the issues discussed in this article please get in touch with Emily Scaife. You can also visit our Corporate, Restructuring and Insolvency webpage.

Key contact

Emily Scaife

Emily Scaife Partner

  • Corporate Restructuring and Insolvency
  • Banking and Finance
  • Real Estate Finance

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