Background
BVI perspective
Comment


In a recent decision, the United Kingdom Supreme Court clarified the duty of directors of insolvent or near insolvent companies to consider the interests of creditors. While BTI 2014 LLC v Sequana SA relates to company law in the United Kingdom, it will have far reaching implications on the understanding of directors' duties relating to insolvency across the commonwealth and, in particular, offshore jurisdictions.(1)

Background

Both common law and the (UK) Companies Act 2006 impose on company directors a duty to act in good faith to promote the company's success. The traditional view is the company's interests are synonymous with the interests of the company's shareholders. But in recent decades, the law began to acknowledge that when the company approaches insolvency or becomes insolvent, the interests of a company's creditors could be affected by the management of the company. Accordingly, the law began to impose a duty on directors to consider the interests of creditors when discharging their fiduciary duties to the company in insolvency contexts. This rule, known as the West Mercia rule,(2) was never consistently explained in case law. Additionally, the language used by the courts often caused confusion about the nature of the rule and the precise circumstances in which it arose.

In Sequana, the Supreme Court held that the so-called rule in West Mercia did not create a new directors' duty towards creditors; there is no separate "creditor duty" which can be enforced by them, despite wide use of that term. Instead, the rule in West Mercia modifies the traditionally understood duty of directors to the company. For so long as the company is financially stable, the directors' duty to promote the company's success encompasses the interests of the shareholders. However, when the company reaches a point where it is insolvent (on a cash flow or balance sheet analysis), or its insolvency is imminent, the directors must begin to take into account the interests of the creditors as well as the shareholders when discharging their duties to the company.

BVI perspective

In the British Virgin Islands, directors' duties to the company are governed by section 120 of the BVI Business Companies Act 2004. This section is markedly different from its counterpart in the United Kingdom. In the British Virgin Islands, the directors have a duty to act in good faith in the company's interests. Unlike in the United Kingdom, the BVI legislation does not contain a list of stakeholders, such as members and employees, whose interests need to be considered in the discharge of that duty.

In the British Virgin Islands, the directors' duty to act in good faith in the company's interest is capable of being abrogated where the company falls into one of the below three categories:

  • The company is a wholly owned subsidiary of another company.
  • Where the other shareholders agree, the company is a part-owned subsidiary.
  • The company is a joint venture between its shareholders.

When that is the case, the directors can act in the interests of the parent company or only one of the shareholders (usually the shareholder appointing the director), as the case may be. Immediately, this presents difficulties where the company has creditors and it might be insolvent or approaching insolvency. It is not clear how (or even if) the rule in West Mercia could apply if the company's directors are acting in the interests of the parent company or only one or some of its shareholders.

The Supreme Court in Sequana looked in detail at the rule in West Mercia as it has developed as a matter of common law and whether it survived the enactment of the Companies Act 2006. The Eastern Caribbean Court has not yet given any detailed analysis of the rule in West Mercia. In circumstances where the legislation is so different, there is a question mark as to whether it survived the enactment of the BVI Business Companies Act 2004 if it did exist at common law in the British Virgin Islands.

Comment

While the BVI Courts often follow decisions in England and, in particular, those of the United Kingdom Supreme Court, those decisions are not binding. In the specific context of section 120 of the BVI Business Companies Act 2004, it is difficult to reconcile aspects of the Sequana judgment with BVI law. It may be tempting to suggest that section 120 of the BVI Business Companies Act 2004 can accommodate a rule requiring directors of BVI companies to take creditors' interests into account in insolvency situations. However, it is hard to square that with the carve-outs in section 120 for subsidiaries and joint ventures. It may very well be that the rule in West Mercia applies in the British Virgin Islands but is qualified for subsidiaries and joint ventures. But can it be the case that the BVI legislature deliberately stripped away common law protection for creditors for those kinds of companies without expressly saying that it was doing so?

It remains to be seen how the BVI Commercial Court will grapple with the Sequana decision in the context of the BVI Business Companies Act 2004. The Sequana decision is important because it clarifies the duties of directors of companies facing insolvency in the United Kingdom. However, a BVI judgment dealing with the issues will be needed before it can be understood how the Sequana decision will affect the law in that jurisdiction. Many questions remain from a BVI perspective, but it is recommended that directors of BVI companies seek legal advice on their duties under section 120 where the company approaches or finds itself in financial difficulty.

For further information on this topic please contact Oliver Payne, Shane Quinn, Joey Cheung or Andrea Ho at Ogier by telephone (+852 3656 6000) or email ([email protected], [email protected], [email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.

Endnotes

(1) [2022] UKSC 25.

(2) Derived from West Mercia Safetywear Ltd (in liq) v Dodd [1988] BCLC 250.