UK Supreme Court Judgement on Bankruptcy- Director's Role

The Honorable?Supreme Court of the United Kingdom?unanimously dismissed BTI’s appeal. All members of the Court agreed that?AWA’s directors were not at the relevant time under a duty to consider, or to act in accordance with, the interests of creditors?in the circumstances of this appeal.?The majority judgment, given by?Lord Briggs, was concurred with by?Lord Kitchin. The decision clarified that the duty to consider creditors’ interests is engaged when directors know or ought to know that the company is insolvent or bordering on insolvency. If liquidation is inevitable, creditors’ interests are paramount.?Prior to that, a fact-sensitive balancing exercise is conducted to weigh up competing interests based on the degree of distress. This ruling confirms the obligations of directors to creditors and provides clarity on their duties in insolvency situations.

1. The UK Supreme Court's unanimous decision clarified that the "Creditor Duty" wasn't applicable to the specific case at hand, hence dismissing the appeal. It was emphasized that merely having a "real risk" of insolvency doesn't automatically trigger this duty. Instead, the duty emerges when a company is insolvent, nearing insolvency, or when an insolvent liquidation or administration is highly likely. The majority view highlighted the importance of assessing this based on directors' knowledge or reasonable understanding in each scenario. However, the minority refrained from solidifying a stance on this matter. Directors, during such circumstances, are obliged to consider creditor interests alongside member interests, especially when conflicting. As the company's financial woes escalate, the balance naturally tilts more in favor of creditors' interests.

• This "Creditor Duty" isn't an isolated obligation but an adjustment of the directors' fundamental fiduciary duty to act in the company's best interests. The West Mercia decision laid down the principle that the common law duty to act in good faith in the company's best interests may, at times, demand consideration of creditor interests alongside those of the company's members. This foundational principle has essentially been incorporated into section 172(3) of the Companies Act 2006, which implies that the statutory duty to further the company's best interests under Section 172 is subject to any "rule of law mandating directors, in certain situations, to contemplate or act in favor of the company's creditors."

The Landmark judgement of the UK Supreme Court's decision to dismiss BTI's appeal encompassed several key aspects:

Confirmation of Creditor Duty: The judgment affirmed that directors of a company have a duty to consider the interests of the company's creditors when the company becomes insolvent or approaches insolvency. This duty, recognized under common law, aligns with company and insolvency legislation and the modern corporate rescue culture in the UK. The Court cited the influential 1985 New Zealand case of Nicholson v Permakraft (NZ) Ltd as support for the existence of this creditor duty.

Insufficient "Real Risk" of Insolvency: In this specific case, the Court determined that the creditor duty was not triggered because, at the time the Sequana dividend was paid, the company (AWA) was not actually insolvent, nor was insolvency imminent or probable. The Court clarified that the creditor duty does not apply solely based on a company being at a "real risk" of insolvency.

The Sliding Scale Approach: To address previous ambiguity surrounding the creditor duty's precise content, the Court introduced a sliding scale approach that evolves as the company's financial difficulties become more severe. Two distinct stages within the "twilight zone" of a company were outlined:

a. Stage 1 - Balancing Competing Interests: Once a company becomes insolvent or teeters on the brink of insolvency, directors have a duty to consider the interests of creditors, carefully weighing them against shareholders' interests in cases of conflict. This balancing exercise reflects the law's support for risk-taking and commercial enterprise.

b. Stage 2 - Paramountcy of Creditors' Interests: When an insolvent liquidation or administration becomes inevitable, the interests of creditors take precedence and must be prioritized over shareholders' interests. This recognizes that creditors become the primary economic stakeholders in the company during that period.

These aspects of the Supreme Court's decision provide clarity on the creditor duty, its application in cases of insolvency, and the evolving responsibilities of directors as financial difficulties progress.

• ·???????? Creditor duty confirmed: The judgment confirms the existence of a duty owed to the company by its directors to consider the interests of the company's creditors when the company becomes insolvent or approaches insolvency. The Court held that the duty arose from the common law but was consistent with company and insolvency legislation and with the "modern corporate rescue culture" in the United Kingdom. The Court noted that the creditor duty was recognised in the seminal 1985 New Zealand decision in?Nicholson v Permakraft (NZ) Ltd.

Thus there is a paradigm shift. The Supreme Court's decision offers directors certain insights into the application of the Creditor Duty. Yet, it also introduces uncertainties. Notably, there's ambiguity as the Court didn't provide precise parameters for what constitutes being "bordering on insolvency" or when "an insolvent liquidation or administration is probable." Additionally, the Court didn't definitively address whether directors should weigh creditor interests in cases where a company isn't insolvent but grapples with other financial challenges.

Following this ruling, directors overseeing insolvent companies must conscientiously assess their companies' financial health. Should any doubts arise regarding the applicability of the Creditor Duty, seeking legal counsel becomes imperative.

In UK the law are specific in regard that

There have been a few paradigm shifts in UK bankruptcy law:?

• Insolvency Act 1986: Created a "rescue culture"
• Restructuring moratorium: Gives financially distressed companies time to consider options like debt restructuring or new investment
• Pre-packaged insolvency: A popular insolvency management technique where financial creditors negotiate with the corporate debtor

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