BTI 2014 LLC v Sequana SA and Others: United Kingdom Supreme Court relies on Australian case law to settle question on Director’s duties

In BTI 2014 LLC v Sequana SA and Others, the United Kingdom Supreme Court considered a case on appeal which asked the Court to expand the common law duty of directors in a significant way. The Appellant sought to argue that common law director duties should require directors to have regard to the interests of creditors even in circumstances where their company is solvent.

Background

The case on appeal was brought by BTI 2014 LLC, an entity which sought to recover from the Second and Third Respondents, who were directors of a company called AWA, the sum of a dividend that AWA paid to the First Respondent, Sequana SA, almost ten years before AWA was wound up.

Importantly, AWA was neither insolvent nor on the verge of insolvency at the time the dividend payment was made. Notwithstanding this, AWA did have long term contingent liabilities which meant there was a risk that AWA might become insolvent in the future, but that insolvency was not imminent or probable.

The Appellant argued that the directors had breached their director duties by failing to consider the interests of creditors in making the dividend payment and for this reason, the amount of the dividend payment could be claimed by the Appellant.

The relevant rule for the Court to consider was that derived from West Mercia Safetywear Ltd (in liq) v Dodd [1988] (West Mercia). In West Mercia, the United Kingdom Court of Appeal found that in certain circumstances, the interests of a company are taken to include the interests of its creditors as a whole.

The effect of the rule in West Mercia is to require directors to consider the interests of creditors along with those of its members. The weight to be given to their interests, insofar as they may conflict with those of the members, will increase as the company’s financial problems become increasingly serious.

Given the material facts of the case before it, the Court was required to answer the following questions:

1. Is there a rule that, in certain circumstances, the interests of the company, for the purpose of the directors’ duty to act in good faith in its interests, are to be understood as including the interests of its creditors as a whole?
2. What is the content of the duty arising where the rule in West Mercia applies?
3. How does the rule in West Mercia interact with the principle of shareholder authorisation or ratification?
4. How does the rule in West Mercia interact withthe protection of creditors under the insolvency legislation of the United Kingdom?
5. Can the rule in West Merciaapply to a decision by directors to pay a dividend which is otherwise lawful?

Application and the relevance of Australian case law

Of particular interest was the consideration given by the Court to Australian case law authorities on the subject.

The Court observed that the rule in West Mercia was influenced by the decision of the New South Wales Court of Appeal in Kinsela v Russell Kinsela Pty Ltd (1986) (Kinsela), where it was held that shareholders cannot absolve directors from a breach of duty to creditors so as to bar a Liquidator’s claim.

The Court agreed with the approach in Kinsela and found that its approach recognises that where a company is insolvent or bordering on insolvency, the way in which the interests of the company are understood, for the purposes of the directors’ duty to act in good faith in its interests, is extended so as to include the interests of the company’s creditors as a whole as well as those of its shareholders. Further, where the company’s interests have to be understood in this extended sense, it will be a breach of the directors’ duty to the company for them to act in disregard of the creditors’ interests.

In observing the rationale for the approach in Kinsela, the Court quoted a further Australian decision, that of the Federal Court of Australia in Sycotex Pty Ltd v Baseler (1994), which stated that:

“Where a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the shareholders. … [T]he result is that there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator.”

Decision

In its decision, the Court agreed that the duty proposed by the Appellant could not arise in the circumstances, and that the appeal should accordingly be dismissed.

The Court affirmed the rule in West Mercia, namely that directors of a company must consider the interests of creditors alongside those of shareholders, but only in circumstances where a company is insolvent or bordering on insolvency.

It is likely that this decision of the United Kingdom Supreme Court will be considered carefully by the Australian Courts if a similar matter comes before them.

Whilst this approach taken by the United Kingdom Supreme Court reflects the commercial reality, given the confirmation of the rule in West Mercia, company directors will need to take great care in considering their obligations as directors, including considering the interests of creditors, when a company is insolvent or bordering on insolvency.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by: 

Scott Couper, Partner
Beau Foley, Associate