Sequana: “Momentous” Judgment by Supreme Court on the Creditor Duty

The Supreme Court has ruled, for the first time, on the existence, specific content and engagement of the so-called "creditor duty" or the "rule in West Mercia". In doing so, it unanimously dismissed BTI’s appeal. 

Key Takeaways

• The creditor duty is firmly established in English common law and further affirmed by the Companies Act 2006. This duty is to consider, or act in accordance with, the interests of the company’s creditors as a general body (and not the interests of any particular creditors). This duty is not a free-standing duty but rather, an aspect of the director’s duty to the company.
• The creditor duty is engaged 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 creditor duty does not apply merely because a company is at a real (and not remote) risk of insolvency.
• Where a company is insolvent, or bordering on insolvency, but insolvent liquidation or administration is not inevitable, the directors should consider the creditors’ interests, to give them appropriate weight, and to balance them against the shareholders’ interests where they may conflict. The greater the company’s financial difficulties, the more the directors should prioritise the creditors’ interests.
• Where insolvency is inevitable, there being no light at the end of the tunnel, creditors’ interests are paramount.

Directors should continue to seek early and timely legal and financial advice and constantly monitor the financial position of the company as it enters the twilight zone or faces financial difficulties.