When the going gets tough part 2

The Supreme Court decides on duties to creditors: important for directors

What is a “creditor duty” and when does it apply?

Company directors have a common law duty to consider and give appropriate weight to the interests of their company's creditors.

This duty arises when the company is insolvent, bordering on (or facing imminent) insolvency or when it is probable that a company will enter insolvent administration or liquidation, which could be earlier than actual or imminent insolvency. In this context, “insolvency” means cash flow or balance sheet insolvency which is commercially irreversible.

To whom does the “creditor duty” apply?

The “creditor duty” arises as a facet of directors' duties to the company. It is not, the Court said, owed directly to creditors.

The nature of the creditor duty, and the extent to which it overrides any conflicting interest of shareholders, will depend on the extent of the company's financial difficulties. The greater those difficulties, the more priority should be given to creditor interests.

Where an insolvent liquidation or administration is inevitable, the creditors’ interests become paramount as the shareholders cease to retain any valuable interest in the company.

Case reference: BTI 2014 LLC v Sequana SA and others [2022] UKSC 25 (Supreme Court) (Lord Reed, Lord Hodge, Lord Briggs, Lady Arden, Lord Kitchin).