Directors' duty towards the company's creditors?

You are a director of a company and you have lawfully decided to declare dividends to your shareholders. Are you required to consider the interest of your creditors when making this decision?

In Singapore as in UK, directors have a duty to act in the best interest of the company. This can sometimes involve a requirement that directors should consider the interests of creditors of the company. 

The follwing Recent decision of the UK Supreme Court illustrates this:

BTI 2014 LLC (Appellant) v Sequana SA and others (Respondents) [2022] UKSC 25

The case involved a distribution in 2009 of a lawful dividend of €135 million by a company to its only shareholder. The shareholder had debts due to the company and this dividend payment wiped out most of that debt.

At that time the company was solvent. However, it had long-term contingent liabilities of an uncertain amount. There was a real risk that the company might become insolvent in the future, though insolvency was not imminent, or even probable.

It was only in 2018 (9 years later) that it went into insolvent administration.

The following general principles were highlighted by the court:

1. Directors should consider the interest of creditors when the company is insolvent. However, there is no duty owed to the creditor. What is referred to as the "creditor duty" is merely the duty to take into account the interest of creditors.

2. Where the company is insolvent, or close to insolvency, but is not faced with an inevitable liquidation, the interests of creditors should be taken into account and should be balanced against the interests of shareholders where they may conflict.

3. The greater the company’s financial difficulties, the greater should be the priority given to the interests of creditors.

4. The directors are not required to consider the interests of particular creditors in a special position but rather the interests of creditors as a general body.

5. the progress towards insolvency may not be linear, and directors should stay informed of the company’s financial position.

6. Where an insolvent liquidation or administration is inevitable, the creditors’ interests become paramount as the shareholders cease to retain any valuable interest in the company.

Based on the above, the court decided that the creditor duty was not engaged on the facts of this case. This is because, at the time of the 2009 dividend, the company was not actually or imminently insolvent, nor was insolvency even probable. The duty does not apply merely because the company was at a real and not remote risk of insolvency.