BTI 2014 LLC v Sequana SA & Ors

Factual and Procedural Background

Company A, a UK-registered subsidiary of Company B, distributed almost all of its net assets to Company B on 18 May 2009. At that time Company A faced a substantial, but then un-quantified, environmental clean-up exposure concerning “The River” site in The State. Company C had guaranteed that liability and therefore stood as a contingent creditor. Years later the environmental obligation proved far greater than anticipated and Company A entered insolvent liquidation.

Two sets of proceedings followed:

• A claim (assigned from Company A) against the four former directors for breach of duty allegedly owed to creditors.
• An action by Company C under section 423 of the Insolvency Act 1986 alleging that the May 2009 distribution was a transaction defrauding creditors.

Judge [Rose] (High Court) dismissed the directors’-duty claim but upheld Company C’s section 423 claim in respect of the May 2009 distribution. The Court of Appeal (Judges [Longmore], [Richards] and [Henderson]) affirmed. The present opinion concerns the further appeal to the Supreme Court, which has now been dismissed.

Legal Issues Presented

1. Does a rule of law (commonly called “the Rule in West Mercia”) exist which, in certain circumstances, obliges directors to consider or act in the interests of creditors?
2. If such a rule exists, is it triggered merely by a “real and not remote” risk of insolvency, or only when insolvency is irreversible?
3. Is the rule a qualification of the statutory “success duty” (section 172(1) Companies Act 2006) or a separate, self-standing “creditor-duty” owed directly to creditors?
4. How does the rule interact with (a) shareholder authorisation/ratification, and (b) statutory regimes such as wrongful trading (IA 1986, s 214) and preference/transaction-avoidance provisions?
5. Can the rule restrict an otherwise lawful distribution made in accordance with Part 23 Companies Act 2006?

Arguments of the Parties

Appellant’s Arguments

• Section 172(3) confirms an existing common-law obligation that becomes actionable when there is a “real, not remote” prospect of insolvency.
• At that stage the statutory “success duty” transmutes so that directors must “promote the success of the company for the benefit of creditors”.
• The rule should apply even where formal insolvency is not inevitable, otherwise creditors remain unprotected during the critical twilight period.

Respondents’ Arguments

• There is no separate creditor duty; any obligation to creditors is simply a qualification on the directors’ existing fiduciary duty to the company.
• Shareholder primacy – as modified by “enlightened shareholder value” – remains the foundation of section 172; directors cannot be required to serve two masters.
• An expansive duty would undermine the legislative “rescue culture” and duplicate or conflict with the calibrated wrongful-trading regime in IA 1986 s 214.
• Shareholder ratification and the capital-maintenance rules already police improper value transfers; additional duties are unnecessary.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court (majority reasons delivered by Judge Arden, concurring with Judges Reed, Briggs and Hodge) undertook a detailed historical, comparative and statutory review.

• Existence of the Rule. After tracing English, Australian, New Zealand and North American case-law, the Court “clearly approves” a rule that directors of a company in financial distress must consider the interests of the general body of creditors and must not materially harm those interests.
• No self-standing creditor duty. The success duty (Companies Act 2006, s 172(1)) remains owed to the company. Section 172(3) merely qualifies the success duty; it does not replace it with a new duty owed directly to creditors. Accordingly, shareholders and creditors are not “two masters”.
• Content of the obligation. The rule imposes (i) a process duty to weigh creditor interests whenever the company is insolvent or bordering on insolvency, and (ii) a substantive restriction prohibiting directors from taking steps that would materially prejudice creditors. It does not require directors to run the business exclusively for creditors’ benefit.
• Trigger point. Creditor interests become paramount only when insolvency is irreversible and an insolvent liquidation or administration is unavoidable. A mere “real risk” or “likelihood” of insolvency is insufficient.
• Knowledge standard. The Court leaves open, for future argument, whether directors must actually know or merely ought to know that the trigger point has been reached.
• Interaction with statute. The rule complements, rather than conflicts with, wrongful-trading (s 214) and avoidance provisions (ss 238–239 & s 423). Those sections impose ex post liabilities; the rule operates ex ante as a governance standard.
• Ratification. Shareholder authorisation or ratification cannot validate directors’ acts that breach the rule once the company is insolvent, nor can unanimous consent override the maintenance-of-capital doctrine.
• Lawful dividends. Section 851(1) Companies Act 2006 preserves any rule of law rendering a distribution unlawful if it causes insolvency; therefore the rule may still operate notwithstanding compliance with Part 23.

Holding and Implications

DISMISSED. The Court upheld the Court of Appeal, affirming that the May 2009 distribution did not breach the directors’ qualified duty because, at the time of payment, insolvency was not irreversible. It nevertheless authoritatively recognises the Rule in West Mercia as part of English law, clarifies its scope, rejects any self-standing creditor duty, and sets the trigger at the point of unavoidable insolvency.

Practically, directors must maintain up-to-date financial information and remain alert to impending insolvency. When financial distress becomes irreversible they must prioritise creditor interests. The decision harmonises common-law duties with the statutory “rescue culture” and provides the “clear signal beacons” long sought by the corporate community, without creating new liabilities or disturbing the balance struck by the Insolvency Act 1986.