Remedying Judicial Intervention into Private Contract: A Case for Abandoning the Creditor Duty Post-BTI 2014 LLC v Sequana SA [2022] UKSC 25
| Pages | 47-74 |
| Date | 01 April 2025 |
| Published date | 01 April 2025 |
| Author | Alexandra Kosta-Foti |
Remedying Judicial Intervention into Private Contract
47
Cambridge Law Review
(2025) Vol 10, Issue 1, 47–74
Remedying Judicial Intervention into Private Con-
tract: A Case for Abandoning the Creditor Duty
Post-
BTI 2014 LLC v Sequana SA
[2022] UKSC
25
ALEXANDRA KOSTA-FOTI
ABSTRACT
This article identifies a worrisome trend in corporate law: increased judicial intervention in
private corporate contracts and the invocation of moralistic conceptions of fairness and effec-
tiveness that depart from the fundamental aspect of bargain. This problematic approach is
clear in Australian and English jurisprudence on the debt-equity conflict between sharehold-
ers and creditors—precisely, the unprincipled expansion of fiduciary duties to provide en-
hanced protection to creditors when a company goes insolvent. This article focuses on the
theoretical and practical development of the creditor duty since it was introduced by Austral-
ian jurisprudence in
Walker v Wimborne
, with two keys aims: first, to reassert the primacy
of contractual risk allocation; and secondly, to demonstrate that there exists no principled
basis for a creditor duty in England and Wales (specifically focusing on the doctrinal infirmi-
ties in the UK Supreme Court case of
BTI 2014 LLC v Sequana SA
[2022] UKSC 25). This
article identifies an essential normative conflict: what is worse , a lack of adequate compensa-
tion for the level of risk borne by the creditors as the new residual claimants or the imposition
of a risk allocation by law that was never bargained for? The position adopted in this article is
that fairness grounds should not meddle with debtor-creditor risk allocation—not at the ex-
pense of principle, coherence, or contract.
Keywords: creditor duty, fiduciary duties, company law, insolvency, private corporate con-
tracts
I. INTRODUCTION
Corporations: what are they and what is their purpose? A positive ontology of the corporation
as a mere private entity risks undermining the complex structural framework that is
facilitated
Alexandra Kosta-Foti has a First-Class BA (Hons) from King’s College London (where she ranked top of her year)
and a Distinction in the Graduate Diploma in Law (GDL) from City St George’s, University of London, where she is
currently a Visiting Lecturer in Contract Law. Alexandra is a Prince of Wales, Michael Mustill and Dame Juliet Wheldon
Scholar at the Honourable Society of Gray’s Inn and will be undertaking the LLM (Master of Laws) at Cambridge
University in October 2025.
48
Cambridge Law Review (2025) Vol 10, Issue 1
through its legal fiction.
1
This framework consists of a
nexus of contracts
between corporate
participants, including creditors, investors, managers, employees, third parties, and others. As
explicated by Michael C Jense and William H Meckling, the corporation ‘serves as a focus
for a complex process in which the conflicting objectives of individuals’ are brought into ‘equi-
librium within a
framework of contractual relations
’.
2
Such contractual relations can be ex-
press or implied but, most importantly, they are bargains involving a clear allocation of both
rewards but also
risks
.
3
However, not all corporate participants are exposed to the same level
of risks: an important distinction is to be made between debt and equity holders.
The former—creditors—enter into credit contracts with the corporation where they
can bargain for specific rights and renegotiate the terms of their contractual undertakings.
4
As
acknowledged by Lord Reed in
BTI 2014 LLC v Sequana SA
,
5
as a corollary of entering into
a contractual relationship with a company, creditors ‘must be t he guardians of their own in-
terests’.
6
That is an inherent consideration present in all credit arrangements—as bargain in-
volves risk, sophisticated economic actors bargaining at arms’ length are presumed to possess
the knowledge that they are indeed running their own risk when providing credit. Such risk
can, and is, addressed through contractual negotiations and direct protections that exist within
debtor-creditor contracts. For example, creditors can negotiate a higher interest rate to reflect
a corresponding higher risk undertaken or insist on guarantees or securities for their debt.
7
While there exist institutional differences in the bargaining power of different creditor groups,
indirect protection is nonetheless provided through the fact that it is in the company’s interest
to pay its company’s debt in order to carry on its business and to avoid reputational risk that
can affect the company’s creditworthiness and access to future credit that will drive its viability.
8
While creditors are entitled to bargained-for fixed payments, the latter—shareholders—primar-
ily rely on implicit contracts that entitle them to whatever is left after the company has met its
express obligations (debts, liabilities, and other claims , such as employee wages or loan
1
See for example George A Mocsary, ‘Freedom of Corporate Purpose’ (2016) 2016 Brigham Young University Law
Review 1319; Edward B Rock, ‘For Whom Is the Corporation Managed in 2020? The Debate over Corporate Purpose’
(2021) 76 The Business Lawyer 363; John Armour and Michael J Whincop, ‘The Proprietary Foundations of Corporate
Law’ (2007) 27 OJLS 429; David G Yosifon, ‘The Law of Corporate Purpose’ (2013) 10 Berkeley Business Law Journal
181; Yong-Shik Lee,’ Shareholder Primacy as an Untenable Corporate Norm’ (2023) 8 Annals of Corporate Govern-
ance 1; Ann M Lipton, ‘What We Talk about When We Talk about Shareholder Primacy’ (2019) 69 Case Wes tern
Reserve Law Review 863.
2
Michael C Jensen and William H Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure’ (1976) 3 Journal of Financial Economics 305, 311 (emphasis added).
3
For the c reditors, some of the available rewards would be high interest rates, covenants, and collateral to secure the
loan. The corresponding risk materialises into credit risk (i.e. that the creditor may not be able to recover the full amount
of the loan), interest rate risk if the agreed upon return is lower than market trends, and vice versa, and liquidity risk if
the debtor defaults or delays in payments.
4
See for example LS Sealy, ‘Direc tors’ “Wider” Responsibilities – Problems Conceptual, Practical and Procedural’
(1987) 13 Monash University Law Review 164; Frederick Tu ng, ‘The New Death of Contract: Creeping Corporate
Fiduciary Duties for Creditors’ (2008) 57 Emory Law Journal 809; J William Callison, ‘Why a Fiduciary Duty Shift to
Creditors of Insolvent Business Entities Is Incorrect as a Matter of Theory and Practice’ (2006) 1 Journal of Business
and Technology Law 431.
5
[2022] UKSC 25, [2024] AC 211.
6
ibid [27].
7
See for example Simone M Sepe, ‘Directors’ Duty to Creditors and the Debt Contract’ (2006 ) 1 Journal of Business
and Technology Law 553, 557; Andrew K eay, ‘A Theoretical Analysis of the Director’s Duty to Consider Creditor
Interests: The Progressive School’s Approach’ (2004) 4 Journal of Corporate Law Studies 307, 320, 326.
8
Alison Grey Anderson, ‘Conflicts of Interest: Efficiency, Fairness and Corporate Structure’ (1978) 25 UCLA Law
Review 738, 746.
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