BTI 2014 LLC v Sequana SA[1]

On 5 October 2022, the UK Supreme Court released its long-awaited and self-described “momentous” decision considering the fiduciary duty of directors to act in good faith in the interests of the company. Specifically, this decision is the first time that the UK Supreme Court (or the House of Lords) has confirmed that directors owe a duty to consider or act in the interests of the company’s creditors if the company becomes or is at risk of becoming insolvent. In so doing, the decision has implications for directors in New Zealand.

Facts

In May 2009, the directors of Arjo Wiggins Appleton Limited (AWA) declared a dividend of €135 million to its only shareholder, Sequana SA. The dividend payment extinguished almost all of a larger debt that AWA owed Sequana SA. This was a lawful dividend that complied with the Companies Act 2006 (UK) because it was paid out of distributable profits. At the time of distribution, AWA was both balance-sheet and cash-flow solvent and it was able to pay its debts as they fell due.

However, at the time AWA made the dividend payment, it had long-term pollution-related contingent environmental liabilities of an uncertain amount, and an insurance portfolio (assets) of an uncertain value. This meant that AWA had a real, although not probable, risk of becoming insolvent in the future.

In October 2018, almost ten years after the dividend payment, AWA went into insolvent administration. Not all creditors were paid in full through the insolvency process. BTI 2014 LLC (BTI) purchased AWA’s claim against its directors and brought proceedings based on their decision to distribute dividends. BTI alleged that the directors’ dividend decision breached a duty to act in the interests of creditors when there was a real risk of insolvency.

The UK Supreme Court’s decision

The UK Supreme Court held that a duty to have regard to creditors’ interests existed when a company is insolvent or nearing insolvency. This is recognition of the economic interests that creditors have in a company when it is near insolvent. Where there is a conflict with the interests of shareholders, the directors need to balance the competing interests. The Court also explained that the greater a company’s financial difficulties, the more directors should prioritise the creditors’ interest.

The majority agreed that the duty to creditors would be engaged when directors knew, or ought to have known, that the company was insolvent or bordering on insolvency, or that formal insolvency procedures were probable.

The Court dismissed the appeal and held that, in this case, the duty to creditors was not engaged because at the time of the 2009 dividend, AWA was not imminently insolvent, nor was insolvency probable.

Comment (Tom Pasley)

Directors’ duty to creditors has received considerable attention from New Zealand’s most senior courts. The New Zealand Supreme Court’s decision in Debut Homes[2] (see our note here) left unanswered some significant questions. Last year, the Court of Appeal in the Mainzeal[3] litigation (see our note here) emphasised that it is not open to the directors of a near-insolvent company to trade on unless they obtain the consent of affected creditors and/or ensure that creditors who have not consented are paid in full. The Court of Appeal also suggested that Parliament should review and reform New Zealand’s statutory insolvent trading regime.

The New Zealand Supreme Court is due to release its decision in the Mainzeal litigation very soon which should clarify the nature and extent of the duty to creditors in New Zealand. While there are both some key similarities and differences between New Zealand and UK law, we expect the Sequana decision will be considered by, and referred to, in the Supreme Court’s decision. The extent to which the UK approach influences our Supreme Court will be of interest to New Zealand directors and their insurers and lawyers.