If a company becomes insolvent, it is crucial that its directors comply with their legal duties. Failure to do so can result in personal liability for the company’s debts as well as legal action and disqualification from being a company director or being involved in a company in the future.

We look at exactly what a director’s duties on company insolvency are and some of the risks to be aware of in dealing with an insolvency.

What is insolvency?

When does the directors' duty arise to consider creditors' interests in the face of insolvency if a liability is disputed? Hayley Capani and Kate Garcia consider the case of Hunt v Singh and conclude we still don't have all the answers.

In a recent case, the High Court has had one of its first opportunities to consider BTI v Sequana [2022] UKSC 25 (see our previous update here), in which the Supreme Court gave important guidance on the existence and scope of the duty of company directors to have regard to the interests of creditors (the so-called “creditor duty”, which arises in an insolvency scenario).

In this Update we take a look at key legal developments for trustees of occupational pension schemes over the past quarter. These include some important cases such as the decision in Virgin Media Limited v NTL Pension Trustees II Limited regarding the consequences of failing to obtain a section 37 certificate, and the decision in British Broadcasting Corporation v BBC Pension Trust Limited regarding whether a reference to members' "interests" in a scheme amendment power included the right to continue to accrue future service benefits.

The increasing rates of insolvencies in Small and Medium Enterprises (SMEs) following the COVID-19 pandemic is continuing at a high rate, and England and Wales have seen the highest rates of insolvencies since 2009. Compared with the second quarter of 2022, the total of registered company insolvencies has increased by 13%. Compared with the first quarter of 2023, the rate of insolvencies has increased by 9%.

Dispute Resolution analysis: In a case where a bankruptcy was annulled on the basis that the alleged tax liability was ill-founded and misconceived, HMRC has been ordered to bear the OR’s and the trustees’ costs of the bankruptcy.

Re Adjei [2023] EWHC 1553 (Ch)

What are the practical implications of this case?

As expected, the scope of directors' duties whilst a company is in financial difficulties has been the source of further consideration by the Court. The recent case of Hunt v Singh [2023] EWHC 1784 raised the question as to whether, following the Supreme Court decision in BTI 2014 LLC v Sequana SA, a director's duty to take into account the interests of creditors arises where the company is at the relevant time insolvent if a disputed liability comes to fruition.

On 5 July 2023 the Court sanctioned Prezzo Investco Ltd's (Prezzo) restructuring plan despite strong opposition by UK tax authority, HMRC.

HMRC has taken a more active approach to opposing restructuring plans and was successful in blocking the plans recently proposed by GAS and Nasmyth (see our alert).

The High Court has considered the point at which the directors’ duty to consider the interests of creditors arose in the context of a tax mitigation scheme that ultimately failed

The judge found that the duty to consider creditors’ interests had arisen once the directors had become aware that there was a real risk that the scheme would fail and that the company would therefore be unable to pay its debts.

Matthew Czyzyk, Natalie Blanc and Toby Morris, Ropes & Gray

This is an extract from the 2023 edition of GRR's Europe, Middle East and Africa Restructuring Review. The whole publication is available here.

This is an Insight article, written by a selected partner as part of GRR's co-published content. Read more on Insight