In Malaysia, generally, a director of a company bears the fiduciary duty to act in good faith and in the best interests of the company. This statutory duty of a director is provided under section 213(1) of the Companies Act 2016 (“CA 2016”) where a director of a company has, at all times, the duty to exercise his/her powers in accordance with CA 2016 for a proper purpose and in good faith in the best interest of the company.
A similar provision in the United Kingdom (“UK”) is found under section 172(1) of the UK Companies Act 2006 (“Companies Act 2006”) which provides that a director of a company must act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. The Companies Act 2006 goes further – it imposes a duty on the directors to consider or act in the interests of creditors of the company in certain circumstances, as per section 172(3) of the Companies Act 2006.
This article discusses the case of BTI 2014 LLC (“Appellant”) v. Sequana SA and others (“Respondents”)  UKSC 25 which has been recently decided by the UK Supreme Court. It considered circumstances in which directors should consider the interests of creditors in exercising their fiduciary duty to act in good faith and in the interests of the company.
The facts of the case of BTI v. Sequana SA concern a company called AWA. In May 2009, the directors of AWA caused it to distribute a dividend of €135 million (“the May dividend”) to its only shareholder, Sequana SA (the first respondent). The May dividend was distributed at a time when AWA was solvent on both a balance sheet and a commercial (or cash flow) basis. However, AWA had contingent environmental liabilities of an uncertain amount (related to some long-term pollution) and assets of an uncertain value, giving rise to a real (although not probable) risk that AWA might become insolvent in the future, at an uncertain but not imminent date.
In October 2018, i.e. almost 10 years after the May dividend was distributed, AWA went into insolvent administration (an insolvency process in UK insolvency law when a company is unable to pay its debts by which a company is placed under the control of an insolvency practitioner to enable the insolvency practitioner to achieve objectives laid down by statute). The Appellant (as an assignee of AWA’s claims) sought to recover an amount of the May dividend from AWA’s directors, on the basis that the directors’ decision on the distribution of the May dividend was a breach of the creditor duty, as the directors had not considered or acted in the interests of AWA’s creditors (“Creditor Duty Claim”).
The Creditor Duty Claim against the directors was rejected by both the High Court and the Court of Appeal because, although the directors had not taken into account the interests of AWA’s creditors, the creditor duty had not become engaged by May 2009 (when the May dividend was distributed).
The Appellant then appealed to the Supreme Court. At the Supreme Court, the Appellant argued that the common law imposes a duty upon directors to consider the interests of creditors under section 172(3) of the Companies Act 2006 (as discussed above), and that such duty is owed to the company, even in circumstances where the company is solvent but there is a real but not remote risk of its becoming insolvent at some point in the future.
The Supreme Court Decision
The Supreme Court unanimously dismissed the Appellant’s appeal. All members of the Supreme Court agreed that the directors of AWA were not, at the relevant time (in May 2009), under a duty to consider, or to act in accordance with, the interests of creditors in the circumstances of this appeal.
The Supreme Court considered, among others, the following issues:
Issue 1: Is there a common law creditor duty at all?
All members of the Supreme Court agreed that the creditor duty should be affirmed. Creditors always have an economic interest in the company’s assets. Where the company is insolvent or nearing insolvency, the directors should manage the company’s affairs in a way which takes into account creditors’ interests and avoid prejudicing them. However, the Supreme Court held that directors owe their duties to the company, rather than directly to shareholders or creditors. The company’s interests are taken to include the interests of its creditors as a whole, without having to consider the interests of particular creditors in a special position.
Issue 2: When is the creditor duty engaged?
The creditor duty is engaged where:
- 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; or
- where the transaction in question would place the company in one of those situations.
On the facts of this case, the creditor duty was not engaged as AWA was not actually or imminently insolvent, nor was insolvency even probable at the time of the distribution of the May dividend in 2009. The creditor duty does not apply merely because the company was at a real and not remote risk of insolvency.
Issue 3: What is the content of the creditor duty?
Where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation, the directors should consider the creditors’ interests and balancing it against the interests of shareholders where they may conflict. Greater weight should be given to the creditors’ interests as against those of the shareholders when the financial difficulties of the company is greater.
As to what is meant by the word “insolvency”, Lord Reed held that the term can be understood in this context to mean cash flow or commercial insolvency, or balance sheet insolvency.
In essence, the members of the Supreme Court in BTI v. Sequana SA:-
- affirmed the existence of director’s duty to consider the interests of creditors;
- explained that such duty to creditors is engaged where 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;
- explained that the interests of creditors must be balanced against the interests of shareholders, that:
- if liquidation is unavoidable, greater weight should be given to the creditors’ interest; and
- prior to that, there will be a fact-sensitive balancing exercise to assess the competing interests between the creditors and shareholders, depending on the degree of financial difficulty.
As discussed above, in Malaysia, there is a general duty imposed on the directors of a company to act in good faith and in the best interests of the company as provided under section 213(1) of CA 2016. However, there is no statutory requirement under our CA 2016 to specifically consider the interest of creditors, as provided under the section 172(3) of the UK Companies Act 2006.
The closest would be the duty not to carry out fraudulent trading to deprive creditors of their due which would be a breach of s 540 CA 2016. Any attempt to deal with company assets and monies in the light of imminent insolvency could potentially fall foul of the said section.
Written by: Tan Tong Fang ([email protected]). Tong Fang is an Associate in the Corporate Department of Chong + Kheng Hoe.