Directors must start considering creditors’ interests when they know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. That is the test the Supreme Court set in BTI 2014 LLC v Sequana SA [2022] UKSC 25. A real but remote risk of insolvency is not enough, and once insolvent liquidation or administration is inevitable, creditors’ interests become paramount.

Where does the creditor duty come from?

The normal rule in section 172(1) of the Companies Act 2006 is that a director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Section 172(3) then says that duty has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors.

The official explanatory notes to the Act say the duty to promote success is displaced when the company is insolvent (paragraph 331), and that the law on having regard to creditors as a company nears insolvency was deliberately left to develop (paragraph 332). Paragraph 306 describes the duty to consider creditors in times of threatened insolvency as one of the duties that remain uncodified. Sequana is the case in which the Supreme Court settled its content. Our guide to section 172 covers the ordinary duty that the creditor duty modifies.

What happened in Sequana?

As summarised by ICAS, in May 2009 the directors of a company called AWA caused it to pay a dividend of €135 million to its only shareholder, Sequana SA. The dividend extinguished almost all of a larger debt Sequana owed AWA, and it complied with the distribution rules in Part 23 of the Companies Act 2006 and the common law rules on maintenance of capital. AWA was solvent on both a balance sheet and a cash flow basis, but it had long term pollution related contingent liabilities of uncertain amount and an insurance portfolio of uncertain value. There was a real risk of future insolvency, though insolvency was not imminent or even probable. AWA went into insolvent administration in October 2018, almost ten years later.

The assignee of AWA’s claims sued the directors to recover the dividend, arguing they had failed to consider creditors. The High Court and Court of Appeal rejected the claim, and the Supreme Court unanimously dismissed the appeal because the creditor duty had not been engaged when the dividend was paid.

When is the creditor duty triggered?

ICAS summarises the Supreme Court’s findings as follows:

  • directors owe their duties to the company, not directly to shareholders or creditors, and the creditor duty is not free standing;
  • the 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;
  • it does not apply merely because the company is at a real and not remote risk of insolvency; and
  • it can apply to a decision to pay a dividend that is otherwise lawful.

Insolvency here refers to the two tests in section 123 of the Insolvency Act 1986: being unable to pay debts as they fall due (cash flow), or having assets worth less than liabilities, taking into account contingent and prospective liabilities (balance sheet). The words “ought to know” mean a board cannot avoid the duty by not looking at the numbers.

How much weight do creditors’ interests get?

Company’s position What directors must do
Solvent, even with a real but remote risk of future insolvency Ordinary section 172 duty to promote success for the members
Insolvent, bordering on insolvency, or insolvent liquidation or administration probable but not inevitable Consider creditors’ interests and balance them against shareholders’ where they conflict; the greater the financial difficulty, the more weight creditors get
Directors know or ought to know insolvent liquidation or administration is inevitable Treat creditors’ interests as paramount, because shareholders no longer retain any valuable interest

ICAS notes that the last stage uses the same trigger as wrongful trading under section 214 of the Insolvency Act 1986. The interests in question are those of creditors as a general body. Directors are not required to give special consideration to particular creditors in a special position.

How does the creditor duty fit with wrongful trading?

The two run alongside each other but are different. Wrongful trading under section 214 bites only once a director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation or administration, and the defence is having taken every step to minimise the potential loss to creditors. The creditor duty starts earlier, in the zone where insolvency is real or probable but not yet inevitable, and it governs how every decision is made, including dividends, asset sales, security for connected lenders and payments to particular suppliers. Our page on wrongful trading explains the later stage.

The Insolvency Service’s director information hub sets out what is expected once a company is insolvent: protect the company’s assets, treat all creditors the same, avoid worsening creditors’ financial position, and consult with or consider appointing an insolvency practitioner.

How is a breach enforced?

Because the duty is owed to the company, a claim for breach belongs to the company. In practice it is usually brought after a formal insolvency, by a liquidator or administrator, or, as in Sequana, by someone to whom the company’s claim has been assigned. In a winding up, section 212 of the Insolvency Act 1986 lets the liquidator or a creditor ask the court to order a director to repay money or pay compensation for breach of any fiduciary or other duty, which is the route explained in our guide to misfeasance claims.

Shareholder approval is not a simple answer. Section 239 of the Companies Act 2006 governs ratification of directors’ breaches, but section 239(7) expressly leaves untouched any rule of law about acts the company cannot ratify, so directors should not assume that a members’ resolution protects a decision taken while the company is in difficulty.

What does this look like for a small company?

Illustration only. A company has net assets of £150,000 and pays its bills on time, but a former customer has issued a claim for £400,000 that its solicitors rate as likely to succeed. The two shareholder directors want to pay themselves a £100,000 dividend.

  • On a balance sheet test that counts contingent liabilities, the company may already be insolvent or close to it, so the creditor duty is likely to be engaged even though cash flow is fine.
  • The directors must weigh the claimant and other creditors against themselves as shareholders. Stripping out £100,000 that would otherwise meet a probable liability is hard to justify.
  • Complying with the distributable profits rules does not answer the point: Sequana confirms the creditor duty can apply to an otherwise lawful dividend. See also how to pay dividends legally and unlawful dividends.

If the company later fails, a liquidator would look closely at the minutes for that decision.

What mistakes do directors make?

  • Looking only at cash. Section 123(2) counts contingent and prospective liabilities, so a company with cash in the bank can still be balance sheet insolvent.
  • Favouring connected creditors. Repaying a director’s loan or a friendly lender first is the opposite of treating creditors as a general body. ICAEW guidance on the zone of insolvency warns that transactions that may be seen as preferential or at an undervalue need particular care.
  • Not recording the reasoning. ICAEW recommends detailed minutes of regular board meetings and careful scrutiny of every new liability, especially customer deposits. A board’s going concern assessment is often the best evidence of what directors knew.
  • Resigning to escape. The same ICAEW article describes resignation as often the worst thing a director can do, since wrongful trading applies to former directors too.
  • Waiting too long for advice. The director information hub tells directors who are uncertain about an action to seek professional advice.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.