Key Takeaways
- Directors owe a duty to creditors only when a company is insolvent, bordering on insolvency, or when insolvency is probable, as set out by the Supreme Court in BTI v Sequana.
- If directors prioritise shareholders over creditors when insolvency is probable, they risk personal liability for breach of duty.
- Ignoring the duty to creditors when financial trouble is likely may result in lawsuits, disqualification or other significant consequences.
- Directors do not owe a direct legal duty to individual creditors but instead must act in the interests of the company, which includes creditors at the appropriate time.
- The duty to consider creditors is not triggered by a mere risk of insolvency but only when insolvency is probable, providing practical certainty for board decision-making.
- There is usually a six-year limitation period to bring claims against directors for breach of duty unless there is fraud or deliberate concealment.
- Once insolvency is probable, directors should document decisions, seek professional advice and keep records to show they have considered creditors’ interests.
- Creditors generally cannot sue directors directly and must usually rely on company liquidators or administrators to bring claims.
- Failing to address these issues early can leave directors personally liable, expose the company to legal action and reduce options for business rescue.
- Our solicitors are specialists in commercial litigation and insolvency, ready to guide directors and creditors through their legal risks and obligations.
If you want confidential legal support on directors’ duties to creditors, you can book a free consultation with our expert team or call 0207 459 4037.
When Do Directors Owe a Duty to Creditors Under Company Law?
Directors of companies in England and Wales owe a duty to act in the company’s interests, but when a business faces financial distress, the law requires directors to shift their focus from shareholders to creditors only at a defined threshold.
The Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25 confirmed that directors must consider creditors’ interests when insolvency is probable—not merely when there is a distant or non-remote risk of financial difficulty. This provides much-needed clarity and ensures directors are not forced to treat creditors’ interests as paramount at the first sign of trouble.
The statutory provisions in the Companies Act 2006, especially section 172(1), set out that directors must promote the success of the company for its shareholders. Section 172(3) confirms this is “subject to any enactment or rule of law requiring directors, in certain circumstances, to consider, or act in the interests of creditors of the company.” The common law, including the rule in West Mercia, establishes that this modification of duty activates when insolvency is probable—not simply possible.
What Happened in the Sequana Case and Why Does It Matter?
The Supreme Court decision in Sequana turned on when directors in charge of a solvent company that was exposed to a major contingent liability should have shifted their focus from shareholder to creditor interests.
In 2009, Arjo Wiggins Appleton Ltd (AWA) paid a €135 million dividend to its parent company, Sequana SA. AWA was at that time solvent, even after the dividend, but its stated business purpose was to fund a significant future environmental clean-up. Years later, the clean-up costs turned out to be far higher than expected. AWA entered insolvent administration in 2018.
BTI 2014 LLC, acting for AWA’s creditors, sued AWA’s directors, arguing the dividend was unlawful because insolvency was a real risk due to the open-ended liability. The Supreme Court decided the directors were not in breach, as the risk of insolvency in 2009 was not yet probable—it was only a real possibility at that stage.
What Is the Directors’ Duty to Creditors Under English Law?
Directors’ legal duties are both statutory and rooted in case law. The core requirement, under section 172(1) of the Companies Act 2006, is that directors must promote the company’s success for the benefit of its shareholders. In normal conditions, directors are right to focus on shareholder value.
Section 172(3), however, provides a carve-out for situations “subject to any enactment or rule of law requiring directors, in certain circumstances, to consider, or act in the interests of creditors of the company.” This means that, where insolvency is probable, the Supreme Court in Sequana stated that “the interests of the company” require directors to act for the whole body of creditors, not just shareholders. The rule in West Mercia Safetywear Ltd (in liq) v Dodd was confirmed as good law.
This shift is not a new duty to creditors themselves. Instead, it is a modification of the duty under section 172(1): directors owe a duty to the company, but what counts as the company’s interests changes when probable insolvency arises.
To learn more about directors’ wider legal responsibilities and the dynamics with shareholders, you may also find our article on Director & shareholder disputes practice page useful.
When Does a Directors’ Duty to Creditors Actually Arise?
The boundary for when directors must consider creditors’ interests was drawn clearly by the Supreme Court in Sequana. The duty arises when the company is insolvent (by the cash flow or balance sheet test), is bordering on insolvency, or where an insolvent liquidation or administration is probable.
It is not enough for there to be a “real, non-remote risk” that a company could become insolvent at some uncertain point in the future. Major but uncertain future liabilities—such as long-tail environmental or litigation claims—do not require directors to switch focus unless, in their reasonable view, these risks mean insolvency is likely.
How to Recognise Red Flags and Spot “Probable Insolvency”
Directors must look for clear warning signs that insolvency has become probable. This means more than just anxiety about finances or unfavourable forecasts.
Key red flags include:
- Cash flow forecasts showing a likely inability to meet debts as they fall due
- Balance sheets predicting liabilities exceeding assets, even accounting for contingent obligations
- Missed payments to major creditors, suppliers or HMRC
- Default notices, enforcement actions, or repeated last-minute extensions from lenders or suppliers
- Recurring significant losses with no credible route back to profitability
- Auditor warnings or qualified opinions
Board’s Solvency Checklist
Directors should:
- Review cash balances and up-to-date cash flow forecasts
- Identify all present and contingent liabilities, noting any disputes
- Record any payment delays or defaults on major debts
- Maintain current management accounts and engage with company auditors
- Document all steps taken and advice received
When these factors suggest insolvency is likely, immediate specialist legal and financial advice should be sought, and every decision carefully recorded.
Step-by-Step: How Should Directors Respond When Insolvency Is Probable?
Directors suspecting their company may be approaching probable insolvency must step up decision-making rigour, prioritising creditor protection over pure profit.
- Call an Emergency Board Meeting
Convene to review all financial data and discuss solvency. - Commission Updated Forecasts
Obtain recent and reliable financial information, often with professional input. - Review Key Transactions
Assess how dividends, disposals, or large new commitments could affect creditors. - Take Specialist Advice
Consult accountants and instruct solicitors experienced in insolvency and directors’ duties. - Prepare Full Board Minutes
Record each step, noting how duties, solvency status, and creditor interests were considered. - Notify Stakeholders if Advisable
If appropriate, communicate responsibly with creditors, investors, or regulators.
If you believe your company is at the threshold of probable insolvency, book a governance review with our team for practical advice on your duties and risk profile.
Board Templates: Sample Minutes and Resolutions for Creditor Consideration
When approaching probable insolvency, the board’s paperwork should reflect careful legal reasoning.
Sample Board Resolution:
“The directors, having reviewed current and projected cash flow, outstanding liabilities, and the company’s obligations to creditors, determine that an insolvent liquidation or administration may be probable. In reaching decisions on any proposed dividend, asset disposal, or trading strategy, the directors specifically resolved to prioritise the interests of the company’s creditors in accordance with their duties at law.”
Draft Language for Board Minutes:
- “The board received updated management and cash flow accounts. A discussion was held regarding current liabilities, creditor demands, and contingent exposures.”
- “Advice from the company’s solicitor and accountant was considered regarding the implications of continued trading and asset disposals.”
- “The directors assessed whether any proposed dividend or related-party payment could prejudice the interests of creditors, given the company’s financial position.”
For tailored board minute templates or drafting assistance, consult with our company law solicitors.
What Are the Legal Risks for Directors Who Do Not Consider Creditors’ Interests?
Directors who fail to shift focus to creditors when the law requires may face serious consequences.
These risks include:
- Claims by the company’s liquidator or administrator seeking compensation or restoration of assets
- Director disqualification proceedings, preventing individuals from acting as directors or managers for years
- Personal liability for wrongful trading, with the court able to require directors to contribute to the company’s assets if they continued trading when insolvency could not be avoided
Deadlines for claims are strict and depend on the specific cause of action, with limitation periods that may be extended in cases involving fraud or concealment. Always check the current period to avoid losing the right to a remedy.
For further reading on how professional advisers’ failures can impact directors’ liability, see our guide on Professional Negligence Claims Against Solicitors – When Does the Limitation Period Start?.
How Sequana Compares to Wrongful Trading and Other Insolvency Offences
While Sequana determines when directors must shift their focus in decision-making, other legal rules also guard against misconduct as insolvency approaches.
- Wrongful trading (section 214, Insolvency Act 1986): Directors are personally liable if, when aware that insolvent liquidation cannot be avoided, they continue trading and worsen the loss to creditors.
- Fraudulent trading (section 213, Insolvency Act 1986): Civil and criminal liability arises if a business is run to defraud creditors.
- Transactions at undervalue (section 238, Insolvency Act 1986) and preferences (section 239): Allow reversal of asset transfers or payments that disadvantage creditors before insolvency.
The Sequana threshold (probable insolvency) can arise before the point at which wrongful trading liability attaches (when no reasonable prospect of avoiding insolvency remains). Liquidators frequently pursue both paths, depending on the evidence.
What Do the Courts Say About Directors’ Duty to Creditors on Insolvency?
The key authority is BTI 2014 LLC v Sequana SA [2022] UKSC 25, which clarified and refined earlier law from West Mercia Safetywear Ltd (in liq) v Dodd [1988] BCLC 250.
In Sequana, directors paid a major dividend while the company was solvent but exposed to long-term liabilities. The Supreme Court found there was no breach, as insolvency was not yet probable. In West Mercia, directors paid out funds while a subsidiary was bordering on insolvency and were held liable for failing to respect creditor interests.
These cases confirm that directors’ duty to creditors is not a direct obligation, but a modified version of the broader duty to the company—one that kicks in as insolvency becomes probable.
What Laws and Deadlines Apply to Directors’ Duties to Creditors?
The primary legal framework in England and Wales includes:
- Companies Act 2006, sections 172(1) and 172(3): state the general and modified duty to the company (including creditors as required)
- Companies Act 2006, sections 830–853: govern lawful distributions and dividends
- Insolvency Act 1986:
– section 213 (fraudulent trading)
– section 214 (wrongful trading)
– section 238 (transactions at undervalue)
– section 239 (preferences)
Claims for breach of duty are generally subject to a six-year limitation period from the wrongful conduct, but longer periods may apply in cases of fraud or concealment. Limitation periods for director disqualification are not specified here and can vary. If in doubt, take legal advice promptly—missing deadlines can forfeit your rights.
What Creditors and Shareholders Need to Know After Sequana
After Sequana, only the company (through a liquidator, administrator or, rarely, a shareholder derivative action) can bring a claim against directors for breach of duty to creditors. Individual creditors lack a direct right of action.
Shareholders cannot lawfully authorise or ratify director conduct that prejudices creditors once insolvency is probable—such ratification is ineffective.
For a successful claim, creditors or officeholders should assemble:
- Board minutes showing what issues were discussed and how decisions were made
- Management accounts and financial information illustrating the company’s insolvency status at key times
- Records of advice from solicitors, accountants, and auditors
- Complete evidence of any asset transfers, preference payments or unusual transactions
If you are a creditor or shareholder worried about director conduct ahead of insolvency, our litigation lawyers can review your potential claims and help preserve vital evidence.
Criticism and Open Questions: Where Could the Law Move Next?
While Sequana brought welcome clarity, some practical questions remain unresolved.
Notably, uncertainty persists around:
- Exactly when “probable insolvency” commences, especially where forecast risks are debated
- How close to insolvency is “close enough” for the duty to arise
- Disagreement between directors or advisers about interpreting financial forecasts and risk
Our solicitors monitor these developments closely and will keep clients informed as the courts and regulators refine the law further.
Our Approach to Directors’ Duty to Creditors Claims
Our team is trusted for guiding directors, boards, shareholders and creditors through issues involving directors’ duty to creditors.
- Strategic insolvency advice that reflects the complexities of Sequana and allied authorities
- Governance review and documentation support when red flags appear
- Drafting of minutes and board resolutions to reduce litigation risk
- Step-by-step support with creditor negotiations, bank queries, and regulatory requests
- Navigation through every stage of distress and formal insolvency procedures
For advice tailored to your company’s circumstances, explore our Insolvency (corporate) or Director & shareholder disputes resources, or speak directly with our specialists.
Frequently Asked Questions
What is the difference between a “real risk” and “probable” insolvency in directors’ duties?
A “real risk” means insolvency is possible but not yet likely. After Sequana, only “probable” insolvency (meaning likely, not just possible) triggers the duty to creditors.
Can directors rely on D&O insurance if sued for breach of creditors’ duty?
D&O insurance often includes cover for directors’ breach of duty claims, but some insolvency-related claims are excluded. Consider reviewing your policy and seeking advice.
Are non-executive directors treated differently under Sequana?
All directors, including non-executives, are bound by directors’ duties. The expected degree of involvement may vary, but the legal principles apply equally to the full board.
How should board minutes evidence that creditor interests have been considered?
Minutes should record the company’s financial position, detail information reviewed, advice received, and document any express discussion of creditor interests for core decisions.
Does the duty apply to group companies and subsidiaries?
Yes. The duty to creditors under Sequana applies to all companies in England and Wales, including subsidiaries. Each entity must consider its own solvency, regardless of group support.
What if directors disagree about insolvency risk? Who decides?
Carefully document any disagreement. The standard is what a reasonably diligent director would conclude with the available evidence. Take professional advice if dispute persists.
When should directors involve insolvency practitioners?
Consider involving an insolvency practitioner as soon as significant doubts about solvency arise or when insolvency becomes probable. Early intervention may widen rescue options.
Can paying a lawful dividend breach the duty to creditors after Sequana?
Yes. Even if dividends meet statutory requirements, if insolvency is probable at the time, paying it may breach the duty to creditors.
Do creditors need to wait for formal insolvency before action can be taken against directors?
Claims about pre-insolvency conduct are usually brought by a liquidator or administrator, after formal insolvency. Preserving evidence early will support future claims.
What evidence do liquidators need to prove “probable insolvency”?
Financial forecasts, board minutes, communications with advisers, and independent reports demonstrating that insolvency was likely when the decision was made.
You may also find our guides on Wrongful Trading, Transactions at Undervalue and Preferences, or challenging directors for breach of duty, helpful. For guidance on professional advisers’ responsibilities when warning about solvency, read our material on professional negligence.
Get Specialist Advice on Directors’ Duty to Creditors
Knowing exactly when to focus on creditors’ interests is vital for anyone managing a business under financial stress. The Supreme Court’s BTI v Sequana decision requires directors in England and Wales to shift to creditor consideration only when insolvency is probable—but a missed moment brings real risk of claims, personal liability, and disqualification. This comprehensive guide has explained the legal test, warning signs, and steps to protect directors, creditors, and shareholders.
If your company is under financial pressure or you need to challenge a director’s past decision, prompt action is essential to avoid unnecessary loss and safeguard your options. Our team of commercial litigation and insolvency solicitors offers clear, practical guidance and strategic support throughout the process.
