BTI 2014 LLC v Sequana SA [2022] UKSC 25

The Supreme Court’s answer to the question every director in an HMRC enquiry eventually asks: when do I have to start thinking about creditors rather than shareholders? The duty exists, it can bite on a perfectly lawful dividend, but a real risk of insolvency is not enough to engage it.

Why This Case Matters in HMRC Work

Every director of a company facing an unexpected tax assessment asks the same question: at what point do I have to start thinking about HMRC rather than about the shareholders? Sequana is the answer, and it is the most important company law decision of the last decade for anyone advising in the space where tax investigation meets insolvency.

The context matters. Since 1 December 2020 HMRC has been a secondary preferential creditor for PAYE, employee National Insurance, VAT and CIS deductions. A company that pays a dividend, clears a director’s loan account or repays guaranteed borrowing while an enquiry is running is therefore taking money out ahead of a creditor with a preferential claim. Whether that exposes the directors personally depends on whether the creditor duty had been engaged.

The Facts

Arjo Wiggins Appleton Ltd (AWA) was a subsidiary of Sequana SA. In May 2009 AWA paid a dividend of approximately €135 million to Sequana. The dividend was not paid in cash: it was applied to extinguish, by set-off, an equivalent debt that Sequana owed to AWA.

At the time the dividend was paid, AWA was solvent on both the balance sheet and the cash flow tests. The dividend was lawful as a matter of the distributable profits rules. The directors complied with the applicable statutory requirements.

AWA did, however, have a long-term contingent liability of highly uncertain amount, arising from its obligation to contribute to the clean-up of pollution in the Lower Fox River in Wisconsin. It also held an insurance receivable of uncertain value referable to that liability. The combination meant that there was a real risk that AWA might at some uncertain future date become insolvent, but insolvency was not probable, and it was not imminent.

Nearly ten years later, in October 2018, AWA went into insolvent administration. BTI 2014 LLC, as assignee of AWA’s claims, sued the directors, alleging that in paying the dividend they had breached the duty to have regard to the interests of creditors.

Procedural History

• High Court (Rose J): held that the dividend was a transaction at an undervalue within s423 Insolvency Act 1986, but that the creditor duty had not been engaged.
• Court of Appeal [2019] EWCA Civ 112: upheld the s423 finding, confirming that an otherwise lawful dividend can be a transaction defrauding creditors and that the debtor’s statutory purpose need be neither the sole nor the dominant purpose. It also held that a real risk of insolvency was not sufficient to trigger the creditor duty.
• Supreme Court [2022] UKSC 25: dismissed BTI’s appeal. The creditor duty exists but had not been engaged in May 2009.

The Legal Framework

Section 172(1) of the Companies Act 2006 requires a director to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Section 172(3) then provides that the duty in subsection (1) has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

Section 172(3) preserves but does not define the creditor duty. Its content had been left to the common law, principally:

• Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722: the New South Wales decision of Street CJ from which the modern doctrine derives, holding that where a company is insolvent the creditors’ interests intrude.
• West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30: the leading English authority, adopting Kinsela.
• Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242: Cooke J’s formulation, which had been read by some as supporting a “near insolvency” or “risk” trigger.
• Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23: Supreme Court confirmation that the duty is owed to the company, not directly to creditors.

The Issues

1. Does a creditor duty exist at common law at all, or is the position now governed exclusively by statute?
2. If it exists, can it apply to a decision to pay an otherwise lawful dividend?
3. What triggers it, is a real risk of insolvency enough, or is something closer to actual insolvency required?
4. What is its content once engaged?

The Ratio Decidendi

1. The duty exists, and it is owed to the company

The Court confirmed the existence of the duty and its juridical basis. It is not a separate duty owed to creditors as such, creditors have no standing to enforce it directly. It is a modification of the content of the duty owed to the company: in the relevant circumstances, the interests of the company are treated as including, or as being aligned with, the interests of its creditors as a class.

The practical consequence is that the claim belongs to the company and is brought by a liquidator, administrator or assignee, typically as a misfeasance claim under s212 Insolvency Act 1986. An individual creditor, including HMRC, cannot sue the directors directly for breach of it.

2. It applies to lawful dividends

The Court held that the rule can apply to the exercise of the power to pay a dividend, even where the dividend is lawful under the distributable profits rules in Part 23 of the Companies Act 2006. Compliance with the capital maintenance regime is not an answer.

3. The trigger

This is the holding that matters most in practice. The duty is engaged when the directors know or ought to know that:

• the company is insolvent, or
• the company is bordering on insolvency, or
• an insolvent liquidation or administration is probable.

A real risk of insolvency (even a real risk arising from a substantial and genuinely uncertain contingent liability, as in AWA’s case) does not engage it. The Court was conscious that a lower threshold would paralyse ordinary commercial decision-making in companies with long-tail liabilities.

Obiter Dicta: the Content of the Duty

Because the Court held that the duty had not been engaged at all, much of what it said about the content of the duty was strictly unnecessary to the decision. It is nonetheless the guidance practitioners work from, and the sliding scale it describes is now routinely applied at first instance.

• The sliding scale. Where the company is in financial difficulty but insolvent liquidation or administration is not inevitable, the directors must balance the interests of creditors against those of shareholders. The weight given to creditors’ interests increases as the company’s position deteriorates.
• Paramountcy at the point of inevitability. Once an insolvent liquidation or administration is inevitable, the creditors’ interests become decisive, because the shareholders no longer have any economic interest in the company.
• Creditors as a class. The duty is owed by reference to creditors as a general body, not to any individual creditor. A director does not owe HMRC a distinct duty, even where HMRC is by far the largest creditor.
• Divergence within the Court. Lady Arden’s concurring judgment differs in its analysis of the trigger and the content, and the Court expressly left several questions open, including the precise meaning of “bordering on insolvency” and how the duty interacts with a decision that benefits some creditors at the expense of others. Advisers should be cautious about treating the sliding scale as a settled code.

Practitioner Application

Advising directors during an HMRC enquiry

• Quantify the potential liability early, and record it. The trigger test turns on what the directors knew or ought to have known. A contemporaneous assessment of the likely exposure, even a range, is the evidence that determines whether the duty was engaged.
• Distinguish risk from probability. After Sequana, an open enquiry with an uncertain outcome does not of itself engage the duty. What does is knowledge that the company is insolvent, bordering on insolvency, or that insolvent liquidation or administration is probable, which will often be the point at which an assessment is issued and the company cannot meet it.
• Board minutes are the defence. Where a distribution, a loan account repayment or a significant payment is made while an enquiry is running, the minutes should record the directors’ assessment of the company’s solvency, the basis for it, and the professional advice relied on.
• Do not stop at the creditor duty. Even where the duty is not engaged, the same payment may be attacked as a transaction at an undervalue under s238, a preference under s239, a transaction defrauding creditors under s423, an unlawful distribution under s847 CA 2006, or as wrongful trading under s214 IA 1986. Sequana itself is the illustration: the directors won on the creditor duty and the dividend was still caught by s423.
• Watch the disqualification angle. Non-payment of Crown debts is a recognised ground under the Company Directors Disqualification Act 1986, and the factual findings made in a misfeasance claim will travel.

Where a claim is brought

• Attack the trigger first. The claimant must establish that the directors knew or ought to have known that the threshold was crossed at the date of the impugned decision, not with the benefit of hindsight from a later insolvency. Management accounts, forecasts and the state of the enquiry at the time are the battleground.
• Resist hindsight reasoning. AWA went into administration nearly a decade after the dividend. The Court’s refusal to work backwards from that outcome is the most useful feature of the decision for a defendant director.
• Consider s1157 CA 2006 relief where the director acted honestly and reasonably and ought fairly to be excused.

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