BTI 2014 LLC v Sequana S.A.

Heard on 4 and 5 May 2021

This appeal raises questions of considerable importance for company law. It concerns the fiduciary duty of directors to act in good faith in the interests of the company. In this context, the interests of the company have until recent times been treated as being the interests of its members as a whole. So understood, the duty has been given statutory expression in a modified form in section 172(1) of the Companies Act 2006 (“the 2006 Act”), which requires directors to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. However, where the company is insolvent or, according to some authorities, is at some earlier point in the decline of its fortunes, it has been said that the duty to act in the interests of the company should not be interpreted as a duty to act in the interests of the members as a whole, but should instead be understood as a duty to act in the interests of the company's creditors as a whole, or as a duty to take the creditors' interests into account together with those of the members.

A number of justifications have been put forward for these approaches. The one which has received most attention in the authorities proceeds on the basis that the ordinary equiparation of the company's interests with the members' interests reflects the fact that it is ordinarily the members who have a proprietary or quasi-proprietary interest in the company's assets, based upon their entitlement to its residual assets upon its dissolution. Where, on the other hand, the company is insolvent or bordering on insolvency, that interest is said to pass to its creditors, on the basis of their prospective entitlement to the company's assets upon its winding up. It is therefore said to be imperative that directors are required to manage the company in those circumstances in a way which does not prejudice the creditors' interests: an objective which can only be achieved if, in the performance of their duty to act in good faith in the interests of the company, they treat the creditors' interests as paramount, or at least as relevant. It is said that section 172(3) of the 2006 Act, which makes the duty under section 172(1) “subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company”, recognises or at least preserves this common law rule.

As will be apparent from that summary, the proposition that directors are under a duty in respect of creditors' interests raises a number of questions. For example, is it correct to say that there is such a duty? If it is, when does the duty arise: on insolvency (however that may be defined), or at some earlier point? What is the content of the duty? Is it a duty to treat the creditors' interests as paramount, or are they merely to be treated as a relevant consideration, along with others? What are the consequences of a breach of the duty? In particular, what forms of relief are available? These are only a few of the questions which arise.

Not all of these questions need to be decided in the present appeal, or have been the subject of detailed submissions. As this is also an area of the law which is in the course of development, and many aspects of which remain controversial, it would be unwise as well as inappropriate to attempt to answer all these questions in the present case. Nevertheless, as Lord Briggs rightly says, a principled analysis of the existence and engagement of a duty of directors in relation to creditors' interests cannot sensibly be carried out in a state of agnosticism about its content and consequences. In reality, these questions are to some extent inter-connected, as the answers to some of them provide a basis for the answers to others. It is therefore necessary to express a provisional view about some issues which do not call for a final decision.

It is also necessary to take adequate account of other aspects of company law which may be relevant: notably, the power of the members to authorise or ratify acts committed by directors in breach of their duties, so as to make them the company's acts. It would scarcely be coherent for company law to require directors to subordinate the interests of members to those of creditors, or at least to take them into account, if at the same time the members could ratify a breach of that duty. Whatever view one takes of the directors' duty to act in good faith in the interests of the company must therefore be coherent with other relevant aspects of company law.

Regard must also be had to the interaction between any duty of directors under company law in respect of creditors' interests and the relevant provisions of insolvency law. Judicial development of company law should not trespass on areas which are intended by Parliament to be covered by statutory regulation under insolvency law, or undermine the operation of the insolvency provisions which Parliament has enacted.

This appeal is the first occasion on which any of these issues has had to be decided by this country's highest court. They go to the heart of our understanding of company law, and are of considerable practical importance to the management of companies.

This is not only the first occasion on which this court has to decide whether there are circumstances in which directors must act in, or at least consider, the interests of the company's creditors. It is also the first case in this jurisdiction in which the question is raised in relation to a company which was unquestionably solvent at the material time. The question whether, if directors are under a duty in respect of creditors' interests, that duty arises prior to insolvency, is therefore raised for decision for the first time.

In order to succeed on the facts of the appeal, which are fully described in the judgment of Lord Briggs, the appellant seeks to establish that the common law imposes a duty upon directors to have regard to the interests of creditors, which is preserved by section 172(3) of the 2006 Act. It is argued that the duty is owed to the company, and arises in circumstances where the company is solvent but there is a real but not remote risk of its becoming insolvent at some point in the future (with the onset of insolvency, the duty is said to alter to one requiring the directors to treat the creditors' interests as paramount). On the basis that such a duty exists in those circumstances, the appellant, which is an assignee of a company's right of action in respect of an alleged breach of the duty, seeks to recover from the second and third respondents, who were at the material time the directors of the company, an amount equivalent to a dividend which the company paid to the first respondent, which was its parent company and sole shareholder, almost ten years before the company went into insolvent administration. The company was neither insolvent nor on the verge of insolvency at the time of the payment. It was not a trading company: it existed solely because it was liable to meet future environmental clean-up costs, which could not be precisely estimated, but for which it had made provision in its accounts. It is alleged that, since the ultimate liability might be considerably more (or considerably less) than the amount for which provision was made, the payment of the dividend created a real and not remote risk of the company's becoming insolvent at some point in the future, that the directors failed to have regard to the interests of creditors in deciding to declare the dividend, and that there was accordingly a breach of the duty. The payment of the dividend complied with the statutory requirements relating to distributions set out in Part 23 of the 2006 Act, and with the rules concerning the maintenance of capital.

All the members of the court agree that no duty of the kind described arose in those circumstances, and that the appeal should accordingly be dismissed. The members of the court are also in broad agreement in the reasoning by which we reach that conclusion. There remain some differences in our reasoning, particularly on matters which do not directly arise for decision in this case, but that is not surprising when the court is dealing with a legal principle which has only emerged in recent times and whose basis and incidents have hitherto received little judicial attention in this jurisdiction.

In summary, I reject the contention, raised in some of the authorities, that there is a “creditor duty” distinct from the directors' fiduciary duty to act in the interests of the company; but I have come to the conclusion that there are circumstances in which the interests of the company, for the purposes of the latter duty, should be understood as including the interests of its creditors as a whole. As it seems to me, there is a risk of confusion if this is described as a creditor duty, as the parties described it, as there is not a duty owed to creditors, or any duty separate from the directors' fiduciary duty to the company. Rather, there...