Do company directors have a duty to creditors when insolvency looms?

A new Supreme Court ruling has confirmed that company directors must consider their creditors’ interests when insolvency looks likely. But what does this mean for directors in practice?  Let’s find out more.

For the first time, the Supreme Court has made it clear that when a company is nearing insolvency, its directors have a duty to consider its creditors’ interests.  The Supreme Court did not extend the obligation on directors in this situation but did provide some further clarification as to when the duty arises. So, what does it mean in practice for the small and medium-sized businesses we work with closely?

In this article, while steering clear of too much legal jargon, we’ll try to explain it for you. Let’s get started.

The ruling

Generally speaking, when a company is trading, a director’s duty is primarily to the interests of its shareholders. However, if insolvency is near, a director must act in a way that promotes the company’s best interests, while also considering:

• Its employees

• The local community and the environment

• Dealings with suppliers, customers and any other stakeholders

In a case called ‘BTI v Sequana SA’, the Supreme Court expressly confirmed that a director will owe a duty to its creditors when insolvency is imminent. The Court also provided more guidance by stating that the duty will arise 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. Notably the Court did not find that the duties to creditors would be engaged where there was only a “risk” of insolvency, as this would have widened the scope of the obligation on directors.

Guidance for directors

The overarching principle then, as set out by the Supreme Court, is that a director should give their creditors’ interests greater priority the nearer the company is to insolvency. So, the deeper you are in financial trouble, the greater your duty to your creditors. You should also understand that if you leave the company as a departing director, your duty to creditors still stands. 

Here’s what you should do to make sure you’re on the right side of this aspect of company law as you battle to save your business:

• Stay abreast of every aspect of your company’s short and long-term financial situation;

• Keep clear records of everything, including:

• Material transactions such as payment of dividends; and

• The actions taken by the directors at Board Meetings;

• Seek legal advice from a company lawyer, so you’re covered in the event of insolvency and any complaints from creditors.

Get an expert in your corner

As a small to medium business director trying to keep their company up and running during challenging times, these newly clarified duties may seem like an extra hassle to deal with. That’s when you need an expert company and commercial lawyer in your corner.

A great company solicitor can be valuable in good times and bad. At Couchman Hanson, our commercial law experts act more like business guides, helping entrepreneurs start their businesses in the right way. Then, we’re there for that business lifecycle of investment rounds, scaling up, funding, mergers and acquisitions, and so much more. Because we’re there for the long term, we can help you anticipate legal problems before they happen, so you’re not subject to any nasty surprises.

Find out more from Couchman Hanson

At Couchman Hanson, our solicitors genuinely care about getting the best outcome for you. We’re highly professional, with ‘city’ level talent and experience, but also friendly and welcoming. Everything we do fits with our values of integrity, honesty and authenticity.

Call 01428 774756 or visit couchmanhanson.co.uk