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ABSTRACT
UK common law recognises that directors owe a fiduciary duty to consider creditors' interests when a company is insolvent or in financial difficulty. However, the scope of this duty remains unclear, particularly the degree of financial difficulty necessary for it to arise. In 2022, in BTI v Sequana, the Supreme Court did little to resolve these uncertainties, retaining a context first approach, where the duty's triggering point is based on the facts and the risk borne by creditors in the specific case. In contrast, Ireland codified its creditor duty in 2022, setting out a series of legislatively defined financial situations where the duty applies and what the duty entails. This article argues that while a search for complete doctrinal certainty in this area is misguided, a degree of certainty over and above the position in Sequana can be achieved and that Ireland's codification offers valuable lessons for future UK reform.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 For a detailed, cross jurisdictional analysis of this issue see A Aurelio Gurrea-Martínez, ‘Towards an Optimal Model of Directors’ Duties in The Zone of Insolvency: An Economic and Comparative Approach’ (2021) 21(2) Journal of Corporate Law Studies 365.
2 The incentive to do so may be particularly strong in private companies where directors are also shareholders.
3 For example, Kinsela v Russell Kinsela Property Ltd [1986] 4 N.S.W.L.R. 722.
4 Such as connected companies in a corporate group as was the case in the Irish Supreme Court case of Re Frederick Inns Ltd [1994] I.L.R.M. 387. See also West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30.
5 As they have become known in the literature: D Prentice, ‘Creditors’ Interests and Directors’ Duties’ (1990) 10 Oxford Journal of Legal Studies 265; N Ruben, ‘Duty to Creditors in Insolvency and the Zone of Insolvency: Delaware and the Alternatives’ (2010) 7 New York University Journal of Law & Business 333; P Davies, ‘Directors' Creditor-Regarding Duties in Respect of Trading Decision Taken in the Vicinity of Insolvency’ (2006) 7 European Business Organisation Law Review 301.
6 See West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30; Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] 2 B.C.L.C. 153; Re MDA Investment Management Ltd [2005] B.C.C 783.
7 The UK 2006 Act did acknowledge the existence of the creditor duty. S.172(3) states ‘The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.’
8 Modern Company Law for a Competitive Economy: Final Report (2001), [3.17].
9 The explicit rationale for not codifying the creditor duty was that it would require directors to make finely balanced judgments around insolvency and may undermine the Government’s attempts to promote and facilitate a rescue culture. See, White Paper, Modernising Company Law (Cm 5553-1) [3.11].
10 See A. Keay, ‘The Director’s Duty to take into Account the Interests of Company Creditors: When is it Triggered?’ (2001) 25 Melbourne University Law Review 315.
11 See West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30.
12 West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30.
13 Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] 2 B.C.L.C. 153 [74].
14 In re Loquitur Ltd [2003] EWHC 999 (Ch); [2003] 2 B.C.L.C. 422, [240].
15 Statutory Instrument No. 380/2022.
16 Several Irish cases stated that a duty existed, the leading case being Re Frederick Inns Ltd [1994] I.L.R.M. 387 but the case law provided little guidance for when the duty would arise or what it required. Again, as in the UK, the creditor duty was omitted from the general codification of directors’ duties in s.228 of the Irish 2014 Act.
17 Under Irish common law, the creditor duty applied only to directors who were subjectively aware of the company’s insolvency. See Parkes v Hong Kong & Shanghai Bank Corp [1990] I.L.R.M. 341 and Re DSC Ltd [2006] IEHC 179 discussed below.
18 Kinsela v Russell Kinsela Property Ltd [1986] 4 N.S.W.L.R. 722.
19 Nicholson v Permakraft (NZ) Ltd (1985) 3 A.C.L.C. 453.
20 S.172(1) of the UK 2006 Act and S.228(1)(A) of the Irish 2014 Act.
21 S.172(1) of the UK 2006 Act known as Enlightened Shareholder Value. See A Keay, The Enlightened Shareholder Value Principle and Corporate Governance (Routledge 2012).
22 The leading Irish case where this interpretation was adopted is G&S Doherty v Doherty (19 June 1969) where Henchy J. stated that ‘directors are in a fiduciary position, and must exercise their power bona fide for the benefit of the company as a whole, that is to say, the shareholders as a whole’ at 22. Courtney believes this is the correct interpretation of the phrase in the context of private companies. T Courtney, The Law of Companies (4th edn, Bloomsbury 2016), [16.043].
23 The Companies Act 2014 does discuss the interests of shareholders but this arises only as a factor to which directors must have regard alongside the interests of employees. See, Irish 2014 Act s.224.
24 It is worth noting that the phrase can be interpreted differently, as a duty to act in the company’s interests as a separate entity, which may result in prioritising interest groups other than shareholders. This line of thinking is usually directed at larger, public companies where those companies have a significant societal impact. See B Sjåfjell and others, ‘Shareholder Primacy: The Main Barrier to Sustainable Companies’ in B Sjåfjell and BJ Richardson (eds), Company Law and Sustainability: Legal Barriers and Opportunities (CUP 2015) 89–101.
25 See, for example, Walker v Wimborne (1976) 137 C.L.R. 1; Kinsela v Russell Kinsela Property Ltd [1986] 4 N.S.W.L.R. 722; West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30 and Re Frederick Inns Ltd [1994] I.L.R.M. 387. Other areas of law also attempt to address this issue, for example Wrongful Trading under s.214 of the Insolvency Act 1986 and Reckless Trading under s.610 of the Irish 2014 Act.
26 There are shortcomings in these contractual solutions such as informational asymmetries about the true risk involved and differentials in bargaining power which may not facilitate the taking of security. For a full exploration see A Keay, ‘A Theoretical Analysis of the Director's Duty to Consider Creditor Interests: The Progressive School's Approach’ (2004) 4(2) Journal of Corporate Law Studies 307, 319–326.
27 See, A Keay, ‘Directors’ Duties to Creditors: Contractarian Concerns Relating to Efficiency and Overprotection of Creditors’ (2003) 66(5) Modern Law Review 665.
28 The incentive to do so may be particularly strong in private companies where directors are also shareholders.
29 For example, Kinsela v Russell Kinsela Property Ltd [1986] 4 N.S.W.L.R. 722.
30 Such as connected companies in a corporate group as was the case in the Irish Supreme Court case of Re Frederick Inns Ltd [1994] I.L.R.M. 387. See also West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30.
31 (1976) 137 C.L.R. 1.
32 Ibid [15].
33 Ibid [13].
34 [1986] 4 N.S.W.L.R. 722.
35 For a detailed comparison between the UK and Australia in this area of law see RT Langford and I Ramsay, ‘The Contours and Content of the ‘Creditors’ Interests Duty’ (2021) 21(1) Journal of Corporate Law Studies 85.
36 Kinsela v Russell Kinsela Property Ltd [1986] 4 N.S.W.L.R. 722, 730.
37 (1988) 4 BCC 30. Davies notes that the case is the clearest recognition of the creditor duty in English law P Davies, Gower’s Principles of Company Law (6th edn, Sweet and Maxwell 1997) 603.
38 Kinsela v Russell Kinsela Property Ltd [1986] 4 N.S.W.L.R. 722, 730
In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise … … But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.
39 [1994] I.L.R.M. 387.
40 [1991] I.L.R.M. 582, 589.
41 Re Frederick Inns Ltd [1994] I.L.R.M. 387, [46].
42 Ibid [38]. More recently, Clarke J. in Hughes v Hitachi Koki Imaging Solutions Europe [2006] 3 I.R. 457 regarded Re Frederick Inns Ltd as authority for the proposition that directors owe a duty to the creditors on insolvency to preserve the assets so as to enable them to be applied in discharge of the company’s liabilities.
43 [1990] I.L.R.M. 341.
44 Blayney J. contrasted the case with West Mercia Safetyware Ltd v Dodd where the director knew of the company’s insolvency: ‘the defendant in the West Mercia case was aware that the company whose money he transferred was insolvent whereas, in the present case, there is no evidence that [the defendant] knew the claimant company was insolvent’, 349.
45 [2006] IEHC 179.
46 Ibid [35] emphasis added.
47 For example, the New Zealand Court of Appeal held in Nicholson v Permakraft (NZ) Ltd (1985) 3 A.C.L.C. 453, 459 that ‘creditors are entitled to consideration, in my opinion, if the company is insolvent, or near insolvent, or of doubtful insolvency, or if a contemplated payment or other cause of action would jeopardise its solvency’.
48 In Kinsela, Street C.J. refused to ‘formulate a general test of the degree of financial instability which would impose upon directors an obligation to consider the interests of creditors’ Kinsela v Russell Kinsela Property Ltd [1986] 4 N.S.W.L.R. 722, 733
49 For example, Re Horsely & Weight Ltd [1982] 3 ALL ER 1045; Ultraframe (UK) Ltd. V Fielding [2005] EWHC 1638; Brady v. Brady [1988] 3 B.C.C. 535.
50 Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23 [123].
51 Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] 2 B.C.L.C. 153 [74].
52 In re Loquitur Ltd [2003] EWHC 999 (Ch); [2003] 2 B.C.L.C. 422 [240].
53 [2003] 2 B.C.L.C. 153, [74].
54 [2005] EWHC 1638.
55 A similar statement can be seen in Re MDA Investment Management Ltd [2005] B.C.C 783 where Park J. stated the duty arose where the company, ‘whether technically insolvent or not, is in financial difficulties to the extent that its creditors are at risk’, 805.
56 DW Mckenzie-Skene, ‘Directors' Duty to Creditors of a Financially Distressed Company: A Perspective from Across the Pond’ (2007) 1(2) Journal of Business Law and Technology 499, 507–510.
57 R Grantham, ‘The Judicial Extension of Directors' Duties to Creditors’ (1991) Journal of Business Law 1, 15.
58 See the extensive list of directors’ duties in s.172–178 of the UK 2006 Act and s.228 of the Irish 2014 Act. For an overview into codification efforts, see Deirdre Ahern, ‘Directors’ Duties, Dry Ink and the Accessibility Agenda’ (2012) 128 Law Quarterly Review 114.
59 S.174 of the UK 2006 Act and s.228(f) of the Irish 2014 Act.
60 S.175 of the UK 2006 Act and s.288 (g) of the Irish 2014 Act.
61 For an economic analysis of agency costs see E Fama and M Jensen, ‘Separation of Ownership and Control’ (1983) 26 Journal of Law and Economics 327.
62 See, for example, cases such as Hutton v West Cork Railway (1883) 23 Ch D 654; Percivil v Wright [1902] 2 Ch. 421; Re Smith and Fawcett Ltd [1924] Ch 304.
63 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [422].
64 Modern Company Law for a Competitive Economy: Developing the Framework (2000) [3.73].
65 Modern Company Law for a Competitive Economy: Final Report (2001), [3.12].
66 Ibid [3.17].
67 Ibid at Annex C, para 8.
68 ‘Modernising Company Law’ Cm 5553-1, 2002. For a more detailed discussion see A Keay, Directors’ Duties (2nd edn, Jordan 2014) [13.4–13.11].
69 White Paper, Modernising Company Law (Cm 5553-1) [3.11]; BTI 2014 LLC v Sequana SA [2022] UKSC 25 [433].
70 In a second White Paper the Government acknowledged that the duty to promote the success of the company for the benefit of the members had certain limitations and was subject to enactments and rules of law to consider or act in the interests of creditors of the company. ‘Company Law Reform’ Cm 6456, 2002
71 Company Law Review Group, First Report (2001), [11.3.1].
72 Which ultimately led to the enactment of s.228 of the Irish 2014 Act.
73 Company Law Review Group, First Report (2001), [11.3.7].
74 S. 227(5) of the Irish 2014 Act states that the duties of directors shall be interpreted and applied ‘in the same way as common law rules or equitable principles; regard shall be had to the corresponding common law rules and equitable principles in interpreting those duties and applying those provisions.’
75 Company Law Review Group, Report on the Protection of Employees and Unsecured Creditors (2017), [2.3].
76 Ibid 2.3.4. The exact wording recommendation was:
The directors of a company who believe, or who have reasonable cause to believe, that a company is unable or likely to be unable to pay its debts as they fall due, shall– (a) have regard to the interests of the company’s creditors; and (b) preserve the company’s property.
77 Companies (Miscellaneous Provisions) (Covid-19) Act 2020.
78 For a thorough analysis see P Gavin, ‘Jumping the Gun: Codifying the Duty to Consider the Interests of Creditors in the Companies Act 2014’ (2021) 65(65) The Irish Jurist 138.
79 Some have questioned whether the creditor duty survived the enactment of the Irish 2014 Act see G Brian Hutchinson, Keane on Company Law (5th edn, Bloomsbury 2016) 438. However, the heading of s.228 describes the section as a ‘Statement of principal fiduciary duties of directors’ implying that other duties exist which are not stated in the section.
80 S. 172(3) of the UK 2006 Act.
81 [2013] EWCA Civ 968. Pattern J., speaking of s.170(3), stated that the ‘obligation to act in the interests of creditors arises in circumstances where the company is or is likely to become insolvent and is no more than a statutory recognition of the decision of this court in West Mercia Safetywear Ltd v Dodd.’
82 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [71].
83 Ibid [99].
84 Ibid [344].
85 Ibid [153].
86 West Mercia Safetywear Ltd v Dodd [1988] B.C.L.C. 250.
87 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [232].
88 Ibid [8] per Lord Reed; [112], per Lord Briggs, with whom Lord Kitchin agreed.
89 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [3].
90 Ibid [9].
91 For example, s.123 of the UK Insolvency Act 1986.
92 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [8].
93 Ibid [350].
94 Ibid [9].
95 Ibid [10].
96 Ibid [14].
97 Ibid [308].
98 Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23 [123].
99 Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] 2 B.C.L.C. 153 [74].
100 In re Loquitur Ltd [2003] EWHC 999 (Ch); [2003] 2 B.C.L.C. 422 [240].
101 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [88]. The court also noted that many of these expressions arise in obiter observations, since most of these cases concern companies which were actually insolvent at [179].
102 Ibid [94].
103 Ibid [84]. It was noted that ‘there is not to be found in them any clear guidance as to a precise answer to the ‘when’ question.’ [179].
104 Ibid [78].
105 Described in Sequana as ‘West Mercia mode’, [76].
106 Ibid [176].
107 Ibid [176].
108 See P. Schilling de Carvalho and B. Reddy, ‘Credit Where Credit’s Due: The Supreme Court Take on Directors’ Duties and Creditors’ Interests’ (2023) 82(1) Cambridge Law Journal 17, 20.
109 S.224A of the Irish 2014 Act.
110 Directive (EU) 2019/1023 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, amending Directive (EU) 2017/1132.
111 Ibid, Chapter 5, Article 19. For an overview into the enacted duty in Ireland, see R Breen, ‘An Appraisal of the Director’s Duty to Creditors in Ireland’ (2022) 29(10) Commercial Law Practitioner 191.
112 Company Law Review Group, First Report (2001), [11.3.1].
113 See the discussion above of Parkes v Hong Kong & Shanghai Bank Corp [1990] I.L.R.M. 341 and Re DSC Ltd; Fitzpatrick v Henley [2006] IEHC 179.
114 For discussions of this trend in the context of the duty to act in the interests of the company and the duty of care see J Quinn, ‘The Duty to Act in Good Faith in Light of the Business Judgment Principle’ (2016) 27(4) International Company and Commercial Law Review 120 and B Clarke, ‘Duty of Care Skill and Diligence – From Warm Baths to Hot Water’ (2016) 56(56) The Irish Jurist 139 respectively.
115 P Gavin, ‘A Rejection of Absolutist Duties as a Barrier to Creditor Protection: Facilitating Directorial Decisiveness Surrounding Insolvency through the Business Judgment Rule’ (2021) 15 Brooklyn Journal of Corporate Financial and Commercial Law 313, 333–334.
116 Courtney states that a duty to ‘have regard to’ can be ‘can be discharged by thinking about them: it does not demand they are acted upon. Having regard to a person’s interest means understanding what they would like by way of outcome from a corporate act or omission and, to the extent it is possible, harmonising that with the outcome that is in the company’s best interests.’ See T Courtney, The Law of Companies (4th edn, Bloomsbury 2016), [16.033]
117 S.224(A) of the Irish 2014 Act.
118 Although Irish Regulations were accompanied with an information note, it did not provide any detail into the how the legislative framework for the duty was crafted, outlining instead in general terms how the function of the duty within the broader framework of preventative restructuring. See, Department of Enterprise, Trade and Employment European Union (Preventive Restructuring) Regulations 2022 Information Note (2022).
119 T Courtney, S Kearney and D O’Leary, Directors’ Duties: New Statutory Duties to Have Regard to the Interests of Creditors available at https://www.arthurcox.com/knowledge/directors-duties-new-statutory-duties-to-have-regard-to-the-interests-of-creditors/.
120 Company Law Review Group, Report on the Protection of Employees and Unsecured Creditors (2017), [2.3.4].
121 See A Keay, ‘The Director’s Duty to take into Account the Interests of Company Creditors: When is it Triggered?’ (2001) 25 Melbourne University Law Review 315, 316.
122 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [422].
123 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [50].
124 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [164].
125 See, Companies Act 2014, s.224.
126 See, Companies Act 2014, s.228(1)(a).
127 Companies Act 2014, s.224A(1)(c).
128 Ibid.
129 See, A Keay, ‘Formulating a Framework for Directors’ Duties to Creditors: An Entity Maximisation Approach’ (2005) 64 Cambridge Law Journal 614, 626.
130 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [203].
131 Ibid [231], [238].
132 See, 2. 214 of the Insolvency Act 1986. For analysis see A Keay, ‘Wrongful Trading: Problems and Proposals’ (2014) Northern Ireland Law Quarterly 63; R Williams, ‘What Can We Expect to Gain from Reforming the Insolvent Trading Remedy?’ (2015) 78 Modern Law Review 55.
133 BTI 2014 LLC v Sequana SA [2022] UKSC 25, [90].
134 Ibid [94](ii).
135 Ibid [304].
136 Ibid [281], per Lady Arden.
137 BTI 2014 LLC v Sequana SA [2022] UKSC 25, [90].
138 Company Law Review Steering Group, Modern Company Law For a Competitive Economy: Final Report (London 2001) 347. For a discussion on this provision see, BTI 2014 LLC v Sequana SA [2022] UKSC 25 [430]-[434], per Lady Arden.
139 See A Keay, Company Directors’ Responsibilities to Creditors (Routledge 2007) 250. For an overview into the policy of business rescue and the financial support of distress debt such as through the informal London Approach, see V. Finch, ‘Corporate Rescue in a World of Debt’ (2008) 8 Journal of Business Law 756.
140 See A Keay and others, ‘Business Judgment and Director Accountability: A Study of Case-Law Over Time’ (2020) 20(2) Journal of Corporate Law Studies 359.
141 To borrow the language of Pound, who argued against the rigid application of concepts and principles to contract law. R Pound, ‘Mechanical Jurisprudence’ (1908) 8 Columbia Law Review 605.
142 L Sealy, ‘Directors Wider Responsibilities – Problems Conceptual, Practical and Procedural’ (1987) 13 Monash University Law Review 164, 179.
143 Ibid.
144 [1993] 3 I.R. 191.
145 It was taken under s.297A of the Companies Act 1963, the same provision is now in s.610 of the Irish 2014 Act.
146 Re Hefferon Kearns Ltd (No. 2) [1993] 3 I.R. 191, 224. Other Irish cases have expressed similar ideas recognising that trading while insolvent or close to insolvency may be the correct commercial decision once the ‘creditors’ interest are kept to the fore’ (Re USIT World Plc [2005] IEHC 285, [70–71]) and it doesn’t include ‘careless or reckless’ gambling (Re Filte Logistics and Distribution Ltd [2016] IEHC 589, [45]).
147 [1997] 1 B.C.L.C. 341, 348.
148 Ibid.
149 BTI 2014 LLC v Sequana SA [2022] UKSC 25 [176].
150 S.224 of the Irish 2014 Act.
151 P Gavin, ‘Jumping the Gun: Codifying the Duty to Consider the Interests of Creditors in the Companies Act 2014’ (2021) 65(65) The Irish Jurist 138, 145–146.
152 S.172(1) of the UK 2006 Act.
153 S.228(1)(a) of the Irish 2014 Act.
154 S.172(1) of the UK 2006 Act (emphasis added).
155 Company Law Review Steering Group, Modern Company Law For a Competitive Economy: Final Report (London 2001) 347; BTI 2014 LLC v Sequana SA [2022] UKSC 25 [430].
Additional information
Notes on contributors
John Quinn
John Quinn is an Assistant Professor of Corporate Law at Dublin City University. He is interested in all areas of corporate law including corporate finance, supply chain liability and Directors' duties.
Philip Gavin
Philip Gavin is an Assistant Lecturer in the School of Social Sciences, Law & Education in Technological University Dublin. His teaching and research focuses on corporate governance, equity and developments in the duties of directors and trustees.