When do Company Directors have to consider creditors?

Due to the economic challenges the UK is currently facing, it is especially important for company directors to consider and uphold the directors duties imposed on them by the law; the general duties imposed on company directors are contained in Chapter 2 of Part 10 of the Companies Act 2006 (the ‘CA 2006’). In our recent article, ‘Directors: When should you consider creditors’ interests?’, we discussed when a given company director should consider the interests of the creditors of the company they are a director of, in light of the Supreme Court case of BTI 2014 LLC v Sequana SA and others [2022]; this article provides a reminder of some of the elements of that case and highlights the fairly recent case of Stephen John Hunt v Jagtar Singh [2023].

Section 172 of the CA 2006, BTI 2014 LLC v Sequana SA and others [2022] and West Mercia Safetywear Ltd (in liq) v Dodd [1988]

Under section 172(1) of the CA 2006, a given company director has a duty to promote the success of the company they are a director of by acting in the way that they consider, in good faith, would be most likely to promote the success of that company  for the benefit of that company’s shareholders as a whole (and in doing so have regard to other matters stated under that section). The directors’ duty under section 172 of the CA 2006 is subject to any other legal rules (including common law rules) which may require a given director to consider or act in the interests of the creditors of the company they are a director of in certain circumstances.

In the case of BTI 2014 LLC v Sequana SA and others [2022], the Supreme Court affirmed the existence of the common law rule established in the Court of Appeal (Civil Division) case of West Mercia Safetywear Ltd (in liq) v Dodd [1988], that is, in some circumstances, a given director must act in the best interests of the company they are a director of which includes acting in the interests of that company’s creditors as a whole.

In BTI 2014 LLC v Sequana SA and others [2022], the Supreme Court dismissed the appeal it was hearing, ruling that ‘a real and not remote risk of insolvency at some point in the future’ is insufficient to trigger the application of the ‘creditor duty’ to company directors.

In BTI 2014 LLC v Sequana SA and others [2022], it was also suggested that a ‘balancing exercise’ in which a given company director attaches more ‘weight’ to the interests of that company’s creditors (and attaches less ‘weight’ to the interests of that company’s shareholders) as the financial state of that company becomes more dire along a ‘sliding scale’, may be necessary.

This judgment therefore provides at least some guidance to company directors and helps, to an extent, protect their ability to take commercial risks inherent in running a company.

Stephen John Hunt v Jagtar Singh [2023]

In the fairly recent High Court case of Stephen John Hunt v Jagtar Singh [2023], the judge cited BTI 2014 LLC v Sequana SA and others [2022]. In Stephen John Hunt v Jagtar Singh [2023], a company was insolvent due to a tax liability to HMRC (even though that company’s directors thought that the company did not have such a liability due to a scheme which the company had entered into); the judge stated that if a company’s solvency depends on successfully challenging a claim to a current liability of that company, then the ‘creditor duty’ will apply to that company’s directors “if the directors know or ought to know that there is at least a real prospect of the challenge failing.” (Mr Justice Zacaroli at paragraph 51) Thus, this case serves as a useful example of when the ‘creditor duty’ might apply to a given company director.

However, the judge also noted that it is important to understand the difference between the ‘creditor duty’ applying and a breach of the ‘creditor duty’; the judge explicitly recognised that just because a given company director is under the ‘creditor duty’ does not mean that they have breached such a duty and they may not breach such a duty even if they take actions which damage creditors’ interests. This seems to further help, to an extent, protect the ability of company directors to take commercial risks inherent in running a company.

In Stephen John Hunt v Jagtar Singh [2023], which was an appeal by a liquidator against his claim against a former director of an insolvent company being dismissed, the judge decided that the judge hearing the claim should have held that the ‘creditor duty’ applied to the former director, and that whether or not the former director breached the ‘creditor duty’ needs to be re-assessed (but did not rule on whether the former director breached the ‘creditor duty’ or not).

Consequences of Breaching the ‘Creditor Duty’

If a company becomes insolvent, it could be compulsorily wound up. If a director is found to have breached their duty under section 172 of the CA 2006, they could be legally compelled to personally contribute to the assets of the company they are/were a director of, during the course of that company’s winding up (money belonging to that company and money generated by the sale of assets belonging to that company could be distributed to that company’s creditors during a winding up of that company).

In the midst of the UK’s current economic challenges, it is therefore especially important for a given director, particularly of a company facing financial difficulties, to be mindful of whose interests they should be considering whilst upholding their duty to promote the success of the company they are a director of.