Supreme Court judgement clarifies ‘trigger points’ when directors have a duty of care to creditors
The potential personal responsibility of directors, if they fail to take into account the interest of creditors, was recently brought to light in the Supreme Court judgement in BTI 2014 LLC v Sequana SA on 5 October 2022.
The issue at the heart of the ruling was ‘whether the trigger for the directors’ duty to consider creditors is merely a real risk of, as opposed to a probability of or close proximity to, insolvency’. The case has provided an understanding for both directors and their professional advisers on personal liability.
The take-out from the judgement are the ‘trigger points’ at which directors have a duty to take into account creditors’ interests (as opposed to managing the company for the benefit of its shareholders) during times of financial trouble.
The Supreme Court ruling clarified that a duty towards creditors (as a whole) would be triggered:
a. when the company is insolvent or on the brink of insolvency;
b. where an insolvent liquidation or administration is probable; or
c. where the transaction in question would leave the company in either of the above two situations.
The Companies Act 2006 requires that the directors of a company act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members (i.e. shareholders) as a whole. This Supreme Court judgement is a timely reminder that directors can be in a situation where they need to consider the interests of creditors when a company is in financial distress. Failure to do so could result in directors having personal liability.