The Supreme Court judges unanimously affirmed the existence of a “creditor duty”; that is that in certain circumstances directors have a duty to consider the interests of the creditors of a company. While it is referred to as a creditor duty, the duty is actually owed to the company rather than to creditors. In addition, it is not a stand-alone duty but sits alongside a director’s duty to promote the success of the company which are codified in the Companies Act 2006.

Restructuring professionals advising directors of companies in financial distress have been eagerly awaiting the Supreme Court’s analysis of when this creditor duty kicks in, given that, once the creditors duty kicks in, shareholders can no longer ratify a director’s breach of duty. The Supreme Court was required to consider whether, and if so when, the duty could be engaged prior to actual insolvency.

While all the Supreme Court judges agreed that the duty can be triggered prior to actual insolvency, they were split on precisely when it is engaged. The majority view was that the creditor duty is engaged 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. The decision will be of some comfort for directors of companies in financial difficulty as it clarifies that the creditor duty arises at a later stage than merely a ‘real risk’ of insolvency, as was argued by the appellant.

The judges also had to consider the extent to which the directors need to consider creditors interests once the creditor duty kicks in. The majority determined that where the company is insolvent or bordering on insolvency, but is not however faced with an inevitable insolvent liquidation or administration, there is a duty to consider the interests of creditors and balance them against those of shareholders where they may conflict.

They added that the greater the company’s financial difficulties, the more the directors should prioritise the interests of creditors. There is not a cliff-edge moment when the duty arises but rather a sliding scale where, as financial difficulties worsen the emphasis on the interests of creditors, balanced against the interests of shareholders, increases. This scale is something which directors will need to navigate.