Directors' duties to creditors: the Supreme Court speaks

The Supreme Court has just upheld the Court of Appeal’s decision in BTI v Sequana.?

In 2008 and 2009, the directors of an English company had made estimates in respect of the costs to the company of meeting inherited liability for historic river pollution in the United States in the 1950s and 1960s.?Its estimates were accepted as made in good faith, but they turned out to be significantly too low.?Before this emerged, and on the basis of the original liability estimates/reserve, the company declared two significant dividends, which were lawful within the terms of the Companies Act 2006, in the sense that the company had sufficient distributable reserves out of which to pay a dividend.

Once it was discovered that the company’s directors had greatly underestimated the company’s historic pollution liability, a challenge was made to the declared dividends on the basis (inter alia) that the directors, in causing the dividends to be paid, had breached their directors' duty to take into account creditors' interests.?It was argued that before declaring the dividends, the directors should have considered the possibility that their estimates of the pollution liability might have been far too low.?The company had not entered into insolvency at this time.

The Supreme Court has today endorsed the test set out by the Court of Appeal in relation to a transaction which had occurred prior to insolvency as to when the directors’ duty to place the creditors’ interests ahead of the shareholders’ would apply.?The duty applies?when the directors know or should know that the company is or is likely to become insolvent.?In doing so, the court rejected the alternative suggested trigger of when there is “a real as opposed to remote risk of insolvency”, holding (a view endorsed by the Supreme Court) that this latter test was far too early.