In May 2009 the directors of AWA caused it to distribute a ‘lawful’ dividend of 135M euros (“The May dividend”) to its only shareholder, Sequana SA, extinguishing almost all of a larger debt Sequana SA owed to AWA. At that time AWA was solvent on both the balance sheet and cash flow basis, but it had long term pollution related contingent debts of an uncertain amount and assets of uncertain value. There was therefore a ‘real risk’ AWA might become insolvent in the future, but insolvency was neither imminent nor even probable. In October 2018 AWA went into administration. BTI 2014 LLC (“BTI”, assignee of AWA) sought to recover the amount of the May dividend from AWA’s directors on the basis that it prejudiced AWA’s creditors and was thus declared in breach of duty. This was the first UK case where this argument had been made in respect of a solvent company.
Both the High Court and the Court of Appeal rejected BTI’s claim. BTI appealed to the Supreme Court.
Held: (BTI’s appeal unanimously dismissed)
The Supreme Court recognised that, in certain circumstances, the duty of a director to act in the way they consider in good faith would most likely promote the success of the company for the benefit of its members as a whole was modified by a common law rule such that the company’s interests are also taken to include the interests of the company’s creditors as a whole. This modification is supported by a long line of authority from the 1980s onwards and has a coherent and principled justification: while creditors always have an economic interest in the company’s assets, the relative importance of that interest increases as the company nears insolvency. The greater the company’s financial difficulties, the greater weight the directors should give the interests of the creditors over the interest of shareholders in striking the balance where their interests conflict --. All members of the Court were agreed that this so called “creditor duty” was not a free standing duty owed to creditors, but simply an aspect of the director’s duties to the company (-).
On the question of when the creditor duty is first engaged, while the precise wording of the formulation used by each member of the Court varied, they were broadly similar. Lord Briggs (with whom Lord Kitchen agreed) considered the duty was first engaged when insolvency is “imminent” (ie “just around the corner and going to happen”) or when an insolvent liquidation or administration is “probable”. Lord Hodge considered it was “at or near the onset of insolvency”  or when the company is “bordering on insolvency” . Lord Reed considered it was when the company is “insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable” , a formulation with which Lady Arden agreed, with the addition that it should also apply where “the directors plan to enter into a transaction in question would place the company in one of those situations”.
However, there was one significant difference of opinion: while the majority appeared to consider that a director’s knowledge or constructive knowledge (ie in the sense of what they “ought to know”) was relevant to the onset of the duty, Lord Reed and Lady Arden preferred to leave the question open ), although Lady Arden specifically noted that the progress towards insolvency may not be linear and that directors should stay informed of the company’s financial position -.
In addressing the content of the “creditors duty”, Lady Arden considered that directors are not required to act for the benefit of creditors, but only to consider their interests and not to harm those interests , although the other members of the court did not address this point expressly.
All members of the Court agreed that, where an insolvent liquidation/administration is “inevitable” the creditors’ interests become paramount, the shareholders ceasing to retain any valuable interest in the company ; -; [247(iv)]; ; . In Lord Briggs’ judgment, this happens at the point that section 214 of the 1986 Act also becomes engaged . Interestingly, all members of the Court agreed that, properly understood, there was no conflict between the creditor duty and the prohibition against wrongful trading in section 214 of the Insolvency Act 1986  – a question which has been troubling commentators for some time.
As to the actual decision itself, the Supreme Court unanimously decided that , while a decision to directors to pay a dividend which is otherwise lawful could in theory be a breach of the “creditor duty” -[247(ii)]; on the facts of this case the “creditor duty” was not engaged since, at the time of the May dividend, AWA was not actually or imminently insolvent and nor was insolvency probable: a real and not remote risk of insolvency is not enough 
The Supreme court also clarified that, where directors are under a duty to act in good faith in the interests of creditors, actions in breach of that duty cannot be authorised/ ratified by the shareholders , because shareholders cannot ratify transactions at a time where the company is or would be rendered insolvent.
 ie one which complied with the statutory requirements relating to distributions set out in Part 23 of the Companies Act 2006, and with the rules concerning the maintenance of capital
 see s172(1) CA 2006, codifying the common law fiduciary duty to act in good faith in the interests of the company
 as a general body, there being no requirement to consider the interests of particular creditors in a special position [247(iv)]
 also described as the rule or modification in West Mercia after the leading case of West Mercia Safetywear Ltd (in liq) v Dodd  BCLC 250
To be kept up-to-date with our latest news and future events, please complete the short form.
A member of the clerking team will help you resolve your request.