The Supreme Court handed down judgment today in BTI 2014 LLC v Sequana SA, a case that is likely to become one of the leading company law authorities of this generation. Lord Reed noted that the issues raised by the appeal 'go to the heart of our understanding of company law and are of considerable practical importance to the management of companies' (para 7); and Lady Arden observed that the judgment 'is as momentous a decision for company law as this Court's recent decision in Patel v Mirza ... was for the law of illegality' (para 248).
The appeal arose out of a dividend of c. €135 million paid by AWA, an English company, in May 2009. The dividend was lawful under Part 23 of the Companies Act 2006 and the common law maintenance of capital rules; and AWA was solvent when the dividend was paid. But AWA had a contingent liability of an uncertain amount (arising out of environmental litigation in the USA). This gave rise to a real risk, albeit not a probability, that AWA would become insolvent at an uncertain date in the future: para 115. In the event the risk materialised and AWA went into insolvent administration some ten years after the dividend was paid. AWA’s assignee then brought a claim against the former directors contending that the payment of the dividend was a breach of their fiduciary duties. The claim was founded upon the duty (owed to the company) to consider the interests of creditors. This so-called creditor duty has its origins in Australia but was adopted in this jurisdiction in 1988 in an extempore judgment of Dillon LJ (see West Mercia v Dodd [1988] BCLC 250). In the present case, it was common ground that the Court of Appeal was bound by West Mercia as to the existence of the duty (albeit not as to its content or the circumstances in which it is engaged).
In the Supreme Court, the Respondents challenged the very existence of the creditor duty on the basis that it is: (1) conceptually unsound; (2) inconsistent with the common law principle of ratification; (3) inconsistent with older (binding) Court of Appeal authority not cited in West Mercia; and (4) capable of undermining various statutory provisions, notably sections 214 and 239 of the Insolvency Act 1986. Lord Briggs observed at para 138 that the points raised by the Respondents ‘do amount to a formidable basis for undertaking a re-appraisal of the very existence of the creditor duty’; and each of the four judgments in the Supreme Court contains detailed analysis of this ‘fundamental question’ (para 76).
In the event, the Supreme Court decided that the creditor duty does exist, in part because its existence was taken (by the majority) to have been preserved by section 172(3) of the 2006 Act. However, the appeal was unanimously dismissed because the duty, although it exists, is not triggered merely by a real risk of insolvency which is neither probable nor imminent. That conclusion was sufficient to decide the appeal, but the judgments also give important guidance (albeit obiter) about the circumstances in which the duty may be triggered prior to insolvency and the content of the duty where it is triggered (e.g. are the interests of the creditors ‘paramount’ or are they merely to be taken into account and balanced against the potentially conflicting interests of the shareholders). It is not possible to summarise that guidance here, but it is notable that the Supreme Court disagreed with the Court of Appeal’s view that the duty is triggered merely because insolvency is probable (i.e. more likely than not) or that the interests of creditors are necessarily ‘paramount’ when the company is insolvent but liquidation or administration has not become inevitable.
The main judgment was given by Lord Briggs, with whom Lord Kitchin and Lord Hodge (in a concurring judgment) agreed. Lord Reed and Lady Arden gave separate judgments concurring in the result for broadly (but not exactly) the same reasons.
The judgment is available here.
Laurence Rabinowitz KC and Niranjan Venkatesan acted for the successful respondents, instructed by Skadden.