Examining the conduct of directors and personal liability - a recent case

Examining the conduct of directors and personal liability - a recent case


Author: Paula Swain

Applies to: England and Wales

This article looks at the case of BTI 2014 LLC and BAT Industries Plc v Sequana SA, 2016.

The High Court was recently asked to consider whether the payment of dividends from a subsidiary to a parent company were based on incorrect accounts, were made in breach of fiduciary duties owed by the directors to the company or were transactions defrauding creditors. A decision to reduce the company's share capital was also challenged.

This lengthy case lasted 32 days at trial, and heard argument from five silks (senior barristers). The history in the case is too lengthy to summarise here, but it highlights the opportunity for credit managers, and creditor representatives, to consider examining certain decisions made by directors and whether the creditors' interest duty has been activated, and breached.

Share capital reduction

Section 642, Companies Act 2006 describes the circumstances in which a reduction in capital must be supported by a solvency statement. Directors must register a solvency statement with Companies House. The statement will say that in the directors' opinion there is no ground on which the company could then be found to be unable to pay (or otherwise discharge) its debts, and that the company will be able to pay (or otherwise discharge) its debts as they fall due during the year immediately following the date of the statement. In forming their opinions, directors must take into account all of the company's liabilities, including any contingent or prospective liabilities. If a director makes a solvency statement without having reasonable grounds for the opinions expressed in it, they commit a criminal offence punishable by 12 months imprisonment or a fine or both.

In this case, Mrs Justice Rose decided that, 'the opinion that the directors must form is not whether, if calamity were to strike on some or all fronts, the company might be unable to pay its debts - nor is it whether the court would have jurisdiction to wind up the company under section 123 of the Insolvency Act on a petition issued on the day the solvency statement was signed. The test is not a technical one but a straightforward one of applying the words of the section. The directors must look at the situation of the company at the date of the statement and, taking into account contingent or prospective liabilities, form an opinion as to whether the company is able to pay its debts.'

Contingent or prospective liabilities

The test applied here is to ask: "whether the company is deemed to be insolvent because the amount of its liabilities exceeds the value of its assets. This will involve consideration of the relevant facts of the case, including when the prospective liability falls due, whether it is payable in sterling or some other currency, what assets will be able to meet it and what if any provision is made for the allocation of losses in relation to those assets."

Creditors' interest duty

The question here is whether the duty to act in what the directors believe to be in the best interest of creditors had arisen at the time of the dividend. 'The essence of the test is that the directors ought in their conduct of the company's business to be anticipating the insolvency of the company because when that occurs, the creditors have a greater claim to the assets of the company than the shareholders.'

Warning signs might include: the balance sheet showing a deficit of liabilities over assets; unpaid creditors chasing payment and accumulating trading losses and reducing income. The underlying principle is that: 'the acts which a competent director might justifiably undertake in relation to a solvent company may be wholly inappropriate in relation to a company of doubtful solvency where a long term view is unrealistic.'

When considering prospective liabilities and duties, Mrs Justice Rose said: 'It cannot be right that whenever a company has on its balance sheet a provision in respect of a long term liability which might turn out to be larger than the provision made, the creditors' interest duty applies for the whole period during which there is a risk that there will be insufficient assets to meet that liability. That would result in directors having to take account of creditors' rather than shareholders' interests when running a business over an extended period.'


Mrs Justice Rose decided that there was no actionable breach here because the company was not 'on the verge of insolvency or of doubtful insolvency, or in a precarious or parlous financial state' and 'the risk it faced that the best estimate would turn out to be wrong and that the company might not have enough money, when called on in the future, is a risk that faces many companies that have provisions and contingent liabilities reflected in their accounts. It is not enough in my judgment to create a situation where the directors are required to run the company in the interests of the creditors rather than the shareholders of the company.'


Creditors are advised to consider the filed accounts and filing history of their debtor companies to consider whether there might be activities in the company's history that might be challenged (through insolvency measures), and which might throw the spotlight on the actions of directors.

If you see a solvency statement in the filing records with Companies House, consider with your advisers whether there is scope to challenge this, and how.


This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.