In an important decision for U.S. companies with UK subsidiaries, the UK Supreme Court recently handed down its long-awaited judgment in BTI 2014 LLC v. Sequana S.A., the first case in which the UK's highest court considered the duties of directors of UK companies to company creditors.
The court held that a "creditor duty" is triggered when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. The court made clear that the creditor duty is not triggered merely because the company faces a "real risk" of insolvency at some point in the future.
The court also explained that the creditor duty:
- Is owed to the company, and is not a free-standing duty owed directly to the creditors;
- Requires consideration of the interests of all of the company's creditors as a whole; i.e., the directors are not required to consider the interests of particular creditors;
- Cannot be circumvented by shareholder authorization or ratification of a transaction when the company is insolvent; and
- Applies to a decision to pay a dividend, even if the dividend would otherwise be lawful.
The BTI case began in 2009 when the directors of a UK company, AWA, authorized a €135 million dividend to AWA's sole shareholder, Sequana S.A. At the time of the dividend, AWA was considered solvent under UK law, but it had contingent liabilities arising from pollution of the Fox River in Wisconsin. AWA's directors knew that these contingent liabilities could render AWA insolvent in the future.
In 2018, AWA's environmental liabilities were revealed to be much greater than originally estimated, and AWA went into insolvent administration (similar to Chapter 11 bankruptcy in the United States). BTI 2014, LLC subsequently brought claims challenging the legality of the 2009 dividend on the basis that AWA's directors had not considered the interests of the company's creditors when the dividend was authorized.
Because AWA was not insolvent or bordering on insolvency in 2009, BTI's creditor duty claim ultimately failed — even though a "real risk" of AWA's insolvency may have existed.
- Unlike in some jurisdictions, where directors' duties to creditors are only triggered upon actual insolvency, in the UK, the creditor duty can be triggered where a company is "bordering on insolvency" or where liquidation or administration is "probable."
- For U.S. companies with UK subsidiaries having significant liabilities, care should be taken before the UK subsidiary pays a dividend or incurs new material liabilities. Determining whether or not the creditor duty has been triggered will be highly fact-specific. Directors of the UK subsidiary should take legal advice on this question.
Through our extensive network of international relationships, Venable stands ready to assist our clients in achieving their international objectives. Companies with questions about this alert are encouraged to contact Mike Pedone.
* Mike Pedone is authorized and regulated by the Solicitors Regulation Authority (SRA) under registration number 826497. Venable LLP is not authorized or regulated by the SRA.