by Cian Clinch , Michael Kelly January-11-2023 in Dispute Resolution & Litigation
Introduction:
It is a long-established principle in Irish company law that directors must always act in the interest of the company. A statutory obligation for directors to act in the best interests of creditors when a company is facing insolvency was introduced in July 2022 by the Preventive Restructuring Regulations 2022 (the “Regulation”), which implemented the Preventive Restructuring Directive 2019/1023[1]. No guidance has yet been provided by the courts in this jurisdiction as to how these principles may be reconciled in the event of a conflict. However, this issue was recently considered by the UK Supreme Court (“UKSC”) in BTI 2014 LLC v Sequana SA and others.
Background of BTI 2014 LLC v Sequana SA and others:
In May 2009, the directors of a company called AWA distributed a dividend of €135 million (“the May dividend”) to its only shareholder, Sequana SA. This extinguished almost the whole of a larger debt which Sequana owed to AWA. At the time the May dividend was paid, AWA was solvent on both a balance sheet and a cash flow basis. However, it had long-term pollution-related contingent liabilities of an uncertain amount and an insurance portfolio of an uncertain value. There was a real risk that AWA might become insolvent in the future, though insolvency was not imminent, or even probable.
AWA went into insolvent administration almost ten years later, in October 2018, and the appellant, BTI 2014 LLC (“BTI”), as the assignee of AWA’s claims, sought to recover the amount of the May dividend from AWA’s directors. It argued that the directors’ decision to distribute the May dividend was taken in breach of the directors’ duties as they had not considered or acted in the interests of AWA’s creditors.
The Judgment:
The Court unanimously dismissed BTI’s appeal. All members of the court agreed that AWA’s directors were not at the relevant time under a duty to consider, or to act in accordance with, the interests of creditors. This duty was held to arise only when the company is insolvent or bordering on insolvency but not faced with an inevitable insolvent liquidation or administration. Importantly, this was seen by the Court as a corollary of the directors' duties that are already owed to the company rather than a freestanding duty in and of itself. The directors in such circumstances have a duty to promote the success of the company such that the interests of the company are understood to include the interests of the company's creditors as a whole, as well as those of its shareholders.
The Court ruled that the creditor duty arises when the directors know or ought to know that the company is insolvent or is bordering on insolvency or that an insolvent administration or liquidation is probable. Where an insolvent liquidation or administration is inevitable, the creditors’ interests become paramount. Accordingly, it is too early to consider the duty as being engaged in the event that the company faces a "real risk" of insolvency. The Court noted that this is common among companies and so does not reach the appropriate threshold. The directors' duty at that point remains to promote the company's success in the interests of its shareholders. The decision implies a sliding scale of director responsibility to creditors, where the greater the likelihood of insolvency the greater the obligation to take creditors’ interests into account.
The UKSC was also of the view that the duty has a coherent and principled justification. Creditors always have an economic interest in the company’s assets, but the relative importance of that economic interest increases where the company is insolvent or nearing insolvency. In those circumstances, the directors should manage the company’s affairs in a way which takes creditors’ interests into account and seeks to avoid prejudicing them.
Conclusion:
The test created by the Regulation differs from the UK test in that the Irish test relates to whether directors know or believe that the company is or is likely to be unable to pay debts rather than know or ought to know that the company is insolvent or is bordering on insolvency and the BTI case will not be binding in this jurisdiction. However, it is a useful guide as to how Irish courts might decide a case in this area.
The Corporate Enforcement Agency has recently issued guidelines in respect of the Regulation in the form on an Information Note, link. The guidance highlights the importance of maintaining adequate accounting records and provides a list of circumstances that could give rise to a likelihood that the company will be unable to pay its debts. This guidance is particularly useful as Regulation 7 of the Regulations provides that directors may have regard to an early warning system. Therefore, having regard to the factors set out in the guidance would assist directors in avoiding personal liability.
[1] The Preventive Restructuring Directive defines the “best-interests-of-creditors test” as “a test that is satisfied if no dissenting creditor would be worse off under a restructuring plan than such a creditor would be if the normal ranking of liquidation priorities under national law were applied, either in the event of liquidation, whether piecemeal or by sale as a going concern, or in the event of the next-best-alternative scenario if the restructuring plan were not confirmed”.
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About the Authors
Cian Clinch
Cian is a partner in the Commercial & Business team at Hayes solicitors. He predominantly specialises in commercial litigation and dispute resolution and has acted for a variety of companies and financial institutions in contract, debt, insolvency, restructuring and recovery matters.
Michael Kelly
Michael is an senior associate solicitor in the Commercial Litigation & Dispute Resolution team at Hayes. He has experience advising commercial clients with respect to a wide variety of issues, in particular restructuring and insolvency cases. He regularly acts for receivers, liquidators and examiners in High Court and Commercial Court proceedings.