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Update - Directors duties to creditors clarified by the Supreme Court

View profile for Julie Hunter
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No-fault divorce suffers another setback as Supreme Court rejects latest appeal

In October 2022, we reported on the Supreme Court’s decision in the ‘Sequana’ case regarding the duties of directors to creditors of a company in circumstances where the company later becomes insolvent. The court determined the ‘trigger point’ for when a director’s personal liability arose was when there was a real risk of future insolvency.

In that case, the facts were that the company was solvent at the time the payments in question were made and the court considered whether the company’s directors ought to have realised that the company was likely to become insolvent at some future point in time, because there was a known contingent liability which if it fell due would render the company insolvent. The court decided in that case that the possibility of insolvency, whilst real was remote and found the directors not liable for payments made.

In a more recent case of Hunt v Singh [2023] EWHC 1784 (ChD) the court considered the question of whether directors would be personally liable for payments made by the company in circumstances where the company was solvent but was facing a claim by HMRC which it disputed, based on advice from its accountants, but which if found valid, would mean the company was insolvent because it did not have the means to pay the claim made by HMRC.

The court decided that where the company’s solvency depended on it being successful in disputing HMRC’s claim, the duty was triggered if the directors “knew or ought to know that there was least a real prospect of the challenge failing”. In other words, if the directors recognised that there was a chance the dispute to the HMRC claim would fail, and that the company would not be able to pay the value of the claim meaning it was then insolvent, they were then at risk of being held liable for any payments made by the company from that point onwards.

Directors should be conscious of the potential liabilities imposed upon them in cases where there is a risk that decisions they make, and payments out are made, in circumstances where there is a real risk of the insolvency of the company. The courts will determine these cases according to the facts of each case and the director’s knowledge at the relevant time, but to ensure any potential personal liability is avoided, it is good practice to take professional advice on duties to creditors before they act.

Stephensons' insolvency and commercial teams are available to advise and assist directors and their companies on their duties and responsibilities. Call us for advice on 0161 696 6170.