What does today's Sequana decision mean for directors?



On 5 October 2022, the Supreme Court handed down its long-awaited judgment in BTI 2014 LLC v. Sequana S.A. [2022] UKSC 25 concerning the trigger point at which directors must have regard to the interests of creditors pursuant to s.172(3) of the Companies Act 2006 (the "creditors' interests duty").

The previous judgment of the Court of Appeal ([2019] EWCA Civ 112) had determined that the creditors' interests duty may be triggered in circumstances short of actual insolvency, specifically "when the directors know or should know that the company is or is likely to become insolvent… In this context, "likely" means probable" i.e. where there is a greater than 50% chance of insolvency (whether determined using the balance sheet or cash flow test).

The Supreme Court decision

On appeal, the Supreme Court considered the existence of the creditors' interests duty, the timing of the appropriate trigger and its effect i.e. whether creditors' interests are paramount once triggered.

In dismissing the appeal, the Supreme Court has confirmed that the creditors' interests duty arises when the directors know or ought to know the company is insolvent or bordering on insolvency, or insolvency is probable. The content of the creditors' interests duty is to give consideration and weight to creditor interests in a manner that is appropriate to the circumstances of the company at the time. This must be balanced against other stakeholders, including members. Once insolvency is inevitable, creditors' interests are paramount.

What does this mean in practice?

In practice, this means both the trigger for, and content of, the creditors' interests' duty will be matters on which directors will need to take legal advice. To help directors navigate the challenges facing businesses while complying with their own legal duties, and in light of today's judgment, we have prepared a list of top 10 tips that should be considered when boards are meeting to take decisions or discuss the tidal wave of pressures hindering business performance in the current economic climate.

Top 10 tips for directors

  1. All directors have duties, whether they are executive or non-executive, and irrespective of job title. Specific tasks can be delegated, for example, to the CFO/FD, but it is the responsibility of the entire board to consider the company's financial position. At times of financial stress, ensure the board is aware of its legal duties in the relevant jurisdiction.
  2. Hold frequent (telephone or virtual) board meetings to consider the financial position of the business. Additional meetings should be called to consider material developments between scheduled meetings. Ensure a written record is made of all discussions and meetings with detailed reasons given for why decisions have been taken, as this will serve as an audit trail if actions are examined retrospectively.
  3. The board should consider up-to-date, reliable financial and operational information at those meetings, including short-term cash flow and creditor position. Are creditors becoming more "stretched" over time? Are new creditors being acquired? Consider whether and how forecasts have been impacted by events including the COVID-19 pandemic, the ongoing impact of Brexit, the invasion of Ukraine, the energy crisis, and the associated supply chain issues and inflationary factors, and the recent fiscal event.
  4. Review financing and other key commercial contracts for potential breaches and termination events that may be triggered in the current circumstances. Engage at an early stage with lenders and other key financial stakeholders to build and retain trust and maintain an open, regular and structured dialogue.
  5. Consider whether stakeholders to the business can provide support i.e. shareholders, lenders, key suppliers or customers, landlords, or pension trustees.
  6. If decisions are being taken about prioritising payments, note that caution is required before deciding to honour payment obligations to certain creditors while leaving others unpaid.
  7. Be mindful of wider duties to regulators and duties of disclosure and transparency e.g. under the Listing rules.
  8. Identify and manage potential director conflicts of interest in accordance with the company's constitution, in particular directors who also sit on parent/guarantor boards.
  9. Check D&O insurance cover and ensure it is fit for purpose, the premiums paid/renewals made, and all claims and circumstances are properly notified.
  10. Take appropriate, specialist financial and legal advice to support the board's understanding of its duties, and assist with the assessment of the financial position and input on contingency planning options.
Original Article