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Supreme Court ruling to have huge impact on directors of companies in financial trouble

A landmark ruling, passed down this week by the Supreme Court, could have wide-reaching consequences for directors of companies in the UK that find themselves in financial distress.

The case – BTI 2014 LLC v Sequana – was focused on whether or not company directors should have more regard for the interests of creditors if there is a risk the company will collapse. Under current UK laws, a company has a separate legal identity to that of its shareholders, so creditors cannot claim against shareholders’ personal assets.

However, on Wednesday, October 5, the Supreme Court dismissed an appeal against a previous decision by the Court of Appeal, which had ruled that at the point when it is 51% or more likely that a company will become insolvent, directors must have regard to the interests of creditors.

According to the Supreme Court, the duty arises when directors know or ought to know that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable.

Chris Mitchell, a Partner in the Restructuring & Insolvency team at the law firm Aaron & Partners, said: “Shareholders in limited companies are not exposed to liability for their company’s debts, but the risks of being a director are often less well-understood.

“What Wednesday’s case resolves is the question of when directors need to have regard to the interests of the company’s creditors. The answer is 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.

“This really ends the debate around a specific aspect of commercial law that has been around for a few years. Company directors need to be aware of this ruling to ensure they understand their potential liability, and that claims could, in certain cases, be brought against them.

“I often get involved at the point after a company has entered a formal insolvency process, when the liquidator is scrutinising what happened. Frequently, claims can be made against directors for what they did in what’s known as the Twilight Zone period – when their company begins to experience financial distress – even though they may not have appreciated how their position had changed.”

In the last quarter there were 4,908 creditors’ voluntary liquidations according to the Insolvency Service, the highest quarterly number going back to 1960 when the figures were first collected. Winding up petitions – presented by creditors owed money such as HMRC – are also rising.

So what can directors do to best protect themselves?

Chris added: “A Directors and Officers’ insurance policy can usually be purchased and renewed each year at relatively modest cost- if there is a claim then the policy should cover the directors’ potential liability and legal costs, though it would not prevent disqualification and the effects of that if pursued.

“The other key message is to seek advice. If directors get appropriate advice earlier – at the point when their company begins to experience financial distress – and follow that advice then there shouldn’t be any claims later, or at least there should be a good defence. In most situations the advice will provide comfort that the directors have room to manoeuvre to try to turn around the company’s fortunes, or to explore a restructuring, provided they do things in the right way and can demonstrate that.

“If possible, get advice from a solicitor or a licensed insolvency practitioner. Beware of unlicensed debt advisers – whilst there are good operators in that space, it is also a target for scams.”

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Chris Mitchell, Partner in the Restructuring & Insolvency team at the law firm Aaron & Partners

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