Directors' Duties: The Creditor Duty

Directors Duties

It is common knowledge among directors that they, as part of their role as a director of a company, owe certain duties to that company.  The most commonly known duties include: promoting the success of the company, avoiding conflicts of interest and exercising reasonable care, skill and diligence. 

In the round, it is considered that these are duties that are owed to the company, and in practice, that means that these duties can be enforced by the shareholders of the company. 

This can create a somewhat false sense of security, especially where the directors of the company are also the shareholders of the company.  In that case, the directors indirectly owe a duty to themselves - and who would sue themselves?

However, in certain circumstances, the directors of a company do have an additional duty, which is to place appropriate weight upon and have due regard to the interest of the company’s creditors.  This is known as ‘the creditor duty’.

The principle behind this duty has recently been reaffirmed in a Supreme Court case, BTI 2014 LLC v Sequana SA and others.

What are the key takeaways from the case?

• Company directors have a duty to consider and give appropriate weight to the interests of the company's creditors.
• The creditor duty becomes relevant in the context of approaching insolvency, where insolvency proceedings become probable (i.e. this duty can arise before actual insolvency proceedings begin or a formal insolvency process ensues, but there should be more than just a risk of insolvency for the creditor duty to come into play).
• The directors do not owe a duty directly to creditors, but rather the creditor duty is one of the directors’ general duties owed to the company.
• The nature of the creditor duty, and the extent to which it overrides any conflicting interest of shareholders, will depend upon the extent of the company's financial difficulties.

Directors need to be aware of this duty and have regard for when this duty kicks in.  The sensible approach, if you are worried about potential insolvency, would be to take advice on the status of the company and its financial position as soon as insolvency becomes more than just a mere possibility.