BTI 2014 LLC, as assignee of AWA’s claims, sought to recover from AWA’s directors a dividend paid to the parent company Sequana SA, alleging breach of a duty to consider creditors’ interests when there was a real risk of future insolvency. The Supreme Court unanimously dismissed the appeal, holding that while a common law duty exists requiring directors to consider creditors’ interests when a company is insolvent or bordering on insolvency, a mere real risk of future insolvency is insufficient to trigger that duty.
Background
AWA, a UK-registered company, existed principally because it bore a major environmental liability relating to pollution clean-up costs on the Fox River in Wisconsin. In May 2009, AWA’s directors (the second and third respondents) caused the company to distribute a dividend of approximately €135 million to its sole shareholder, Sequana SA (the first respondent), which effectively extinguished a debt owed by Sequana to AWA through set-off. At the time of the distribution, AWA was solvent on both a balance sheet and cash-flow basis. However, AWA had long-term contingent environmental liabilities of uncertain magnitude which, together with uncertainty as to the value of certain assets, gave rise to a real risk — but not a probability — that AWA might become insolvent at some uncertain future date. AWA ultimately entered insolvent administration almost ten years later, in October 2018.
The appellant, BTI 2014 LLC, as assignee of AWA’s claims, brought proceedings against the directors alleging that their decision to approve the May dividend constituted a breach of their duty to consider or act in the interests of AWA’s creditors. Separately, AWA’s main creditor successfully challenged the dividend under section 423 of the Insolvency Act 1986 (transactions defrauding creditors), though the recovery proved worthless as Sequana itself entered insolvency proceedings. Both the High Court (Rose J) and the Court of Appeal (David Richards LJ, with Longmore and Henderson LJJ agreeing) dismissed the claim against the directors, holding that the duty to consider creditors’ interests had not been engaged at the time of the May dividend because AWA was not then insolvent nor was insolvency imminent or probable.
The Issues
The Supreme Court addressed six principal issues:
1. Existence of the Rule in West Mercia
Whether there is a rule of law, preserved by section 172(3) of the Companies Act 2006, that in certain circumstances the interests of the company — for the purposes of directors’ fiduciary duty — should be understood as including the interests of its creditors as a whole.
2. Content of the Duty
What the content of the directors’ obligation is when the rule applies.
3. Trigger for Engagement
The circumstances in which the rule arises — critically, whether a real and not remote risk of future insolvency is sufficient.
4. Interaction with Shareholder Authorisation/Ratification
How the rule interacts with the principle that shareholders may authorise or ratify directors’ breaches of duty.
5. Interaction with Insolvency Legislation
Whether the rule is incompatible with sections 214 (wrongful trading) and 239 (preferences) of the Insolvency Act 1986.
6. Lawful Dividends
Whether the rule can apply to a decision to pay a dividend that is otherwise lawful under Part 23 of the Companies Act 2006 and the capital maintenance rules.
The Court’s Reasoning
Existence of the Rule
The Court unanimously confirmed the existence of the rule in West Mercia. Lord Reed, giving the leading judgment, explained that this is not a freestanding ‘creditor duty’ but rather a modification of the long-established fiduciary duty of directors to act in good faith in the interests of the company. When the rule applies, the interests of the company are understood as encompassing the interests of creditors as a whole, alongside — not in replacement of — those of shareholders. Lord Reed stated:
It is important to understand that the rule in West Mercia does not create any new duty: it merely adjusts the long-established fiduciary duty to act in good faith in the interests of the company.
Lord Briggs (with whom Lord Kitchin agreed) reached the same conclusion, emphasising that section 172(3) of the 2006 Act confirmed the existence of the common law rule:
Generally the formulation used would be construed as a reference to any rule of law in force at the time of the passing of the 2006 Act. Parliament must be taken to have understood the general state of the common law at that time, which by the binding Court of Appeal authority of the West Mercia case did clearly recognise a creditor duty, even if the precise content of that rule of law may have had fuzzy edges.
Lord Hodge agreed, drawing on both the statutory text and the extensive legislative history including the work of the Company Law Review Steering Group. Lady Arden also endorsed the existence of the rule, though she differed on certain points of analysis, viewing section 172(3) as preserving the possibility of such a rule rather than affirming it outright.
Rationale for the Rule
The Court rejected the suggestion that creditors acquire any proprietary or quasi-proprietary interest in the company’s assets on insolvency. Lord Reed preferred to explain the rule on the basis that creditors have a distinct economic interest in the company which emerges when the company is insolvent or bordering on insolvency. He stated:
The analysis may be clearer and more realistic if one thinks of interests in an economic rather than legal sense.
Lord Briggs emphasised the prospective entitlement of creditors through the mechanism of liquidation as the key justification, and the fact that section 214 of the 1986 Act already implicitly recognised that directors must treat the minimisation of creditor loss as paramount once liquidation becomes inevitable.
Content of the Duty
All members of the Court agreed that the rule does not make creditors’ interests automatically paramount upon the onset of insolvency. Rather, the duty operates on a sliding scale. Lord Reed explained:
The weight to be given to their interests, insofar as they may conflict with those of the members, will increase as the company’s financial problems become increasingly serious. Where insolvent liquidation or administration is inevitable, the interests of the members cease to bear any weight.
Lord Briggs expressly rejected the rigid ‘paramount’ formulation adopted in some first-instance cases:
Prior to the time when liquidation becomes inevitable and section 214 becomes engaged, the creditor duty is a duty to consider creditors’ interests, to give them appropriate weight, and to balance them against shareholders’ interests where they may conflict.
Trigger for Engagement — The Decisive Issue
The appellant contended that the rule was triggered whenever there was a real and not remote risk of insolvency. The Court unanimously rejected this submission. Lord Reed held:
I am satisfied that the rule in West Mercia does not apply merely because the company is at a real and not remote risk of insolvency at some point in the future.
Lord Briggs analysed the point in considerable detail, concluding that a ‘real risk’ trigger was too remote from the event (liquidation) which actually converts creditors into the main economic stakeholders. He used the Covid-19 pandemic as a practical illustration of why such a remote trigger would be unworkable:
In March 2020 it must have appeared to the directors of innumerable companies in the travel and hospitality businesses that they faced a real risk of insolvency… Only for the companies in the first (permanently insolvent) group will their creditors have become entitled (actually or inevitably) to share in the proceeds of their winding-up or administration.
Lord Briggs preferred a formulation whereby the rule is triggered when directors know or ought to know that the company is insolvent or bordering on insolvency, or where an insolvent liquidation or administration is probable. Lord Reed expressed a provisional preference for ‘insolvent or bordering on insolvency’, while Lord Hodge agreed with Lord Briggs’s formulation.
Interaction with Ratification and Insolvency Legislation
The Court confirmed that the rule in West Mercia is consistent with the principle that shareholders cannot authorise or ratify transactions which would jeopardise the company’s solvency or cause loss to creditors. The Court also held that sections 214 and 239 of the 1986 Act are not incompatible with the rule, noting the significant differences in trigger, content, remedy, and scope between those statutory provisions and the common law fiduciary duty as modified by the West Mercia rule.
Lawful Dividends
The Court confirmed that compliance with Part 23 of the 2006 Act does not preclude the application of the rule in West Mercia. Section 851(1) of the 2006 Act preserves any rule of law restricting distributions. Lord Briggs gave a clear example: a company with a balance sheet surplus could still be cash-flow insolvent, and directors of such a company could not lawfully distribute a dividend if doing so would bring about or exacerbate cash-flow insolvency.
Practical Significance
This landmark decision provides the first authoritative guidance from the United Kingdom’s highest court on the so-called ‘creditor duty’. Its principal consequences include:
- Confirmation that the rule in West Mercia is part of English law, preserved by section 172(3) of the Companies Act 2006, and is not a freestanding duty to creditors but a modification of the directors’ fiduciary duty to the company.
- Rejection of any test based on a ‘real and not remote risk’ of future insolvency: directors need not consider creditors’ interests as a separate factor unless the company is insolvent, bordering on insolvency, or facing probable insolvent liquidation or administration.
- Adoption of a graduated approach whereby creditors’ interests increase in weight as the company’s financial position deteriorates, becoming paramount only when insolvent liquidation or administration is unavoidable.
- Clarification that lawful compliance with Part 23 distribution rules does not immunise a dividend from challenge under the West Mercia rule.
- Guidance that the rule operates harmoniously with, rather than undermining, statutory insolvency protections including sections 214 and 239 of the 1986 Act.
The decision leaves certain matters for future development, including the precise test of directors’ knowledge, the detailed interaction with insolvency remedies, and the precise remedies available for breach. The Court acknowledged this is a developing area of law and exercised appropriate caution in not resolving issues that did not directly arise on the facts.
Verdict: The Supreme Court unanimously dismissed the appeal. The Court held that while there is a common law rule (the rule in West Mercia, preserved by section 172(3) of the Companies Act 2006) requiring directors to consider and give appropriate weight to creditors’ interests when a company is insolvent or bordering on insolvency, that rule is not triggered merely because there is a real and not remote risk of insolvency at some point in the future. Since AWA was solvent at the time of the May 2009 dividend and insolvency was neither actual, imminent, nor probable, the directors were not in breach of any duty to consider creditors’ interests, and the claim against them failed.
