Paul McQuade KC (PM): Welcome everyone to this seminar on the decision of BTI 2014 LLC v Sequana SA. Lord Reed described the issues raised on the appeal as of being of considerable importance to company law. Lord Briggs, then Lord Kitchener agreed, describing the appeal as providing the first opportunity for the court to address the existing scope and engagement of an alleged duty of company directors to consider or to act in accordance with the interests of creditors when a company becomes insolvent or when it approaches or if there is a real risk of insolvency. Then Lady Arden said that this is a “momentous” decision for company law as a decision based on the face of legality.
By the time this seminar has finished you will know whether this could be said of the Australian position. In Australia we have had a number of decisions which have considered this concept.
These include the New Zealand decision of Nicholson v Permakraft and the New South Wales decision of Kinsela v Russell Kinsela Pty Ltd (in liq). One merely has to undertake a search of Kinsela to identify how many times this has been referred to. In this seminar, the speakers will address the basis of the dispute, the content of the decision and the potential consequences of the decision in Australia.
The speakers for tonight are David Chesterman KC and Matthew Jones. David has recently been appointed King’s Counsel and has over 15 years of experience in commercial litigation and is regularly instructed to represent major corporate clients to resolve disputes concerning insolvency contracts, equity and banking, finance, real property, IP, negligence and regulatory issues.
Matthew Jones has over twelve years’ experience as a barrister. He is known for his strategic and commercial approach to litigation, energy & resources litigation and joint venture disputes. He is also, as I know, involved in many corporations disputes.
It is hoped at the conclusion of this presentation that there will be time for questions. On the chat symbol at the bottom right hand corner of your screen you can prefer questions and if we have time we will answer them. I hand the presentation over to David and Matthew. Thank you.
David Chesterman KC (DC): Thank you very much Paul. Thank you to those joining us physically and virtually. Good evening.
As Paul has alluded to, this case is potentially important for the reason that it is the first time a UK court has considered a few important issues. Firstly, the fundamental justification for what is called the creditor duty, I will come back to what precisely that means in due course, but also ancillary questions such as when that duty is owed and what its content is.
BTI 2014 LLC v SEQUANA SA – SALIENT FACTS
DC: [Slide 4 & 5] The salient facts can be stated in pretty short compass. It concerns a company called AWA which in May 2009 by its directors made dividend payments to its shareholders. It was common ground before the court that the payment of the dividend was lawful in the sense that the payments required with the statutory scheme and the Commonwealth rules about the maintenance of capital. Furthermore, the dividend was paid at a time when AWA was solvent on either a balance sheet or cash flow basis. But, it had long term pollution related contingent liabilities of a certain amount which together with some other uncertainty ones gave rise to what was termed a real risk, although not a probability, that it might become insolvent sometime in the future. As events transpired, AWA in fact went into insolvency almost ten years later – in October 2018. That is the background.
[Slide 6] In terms of how the case was brought, BTI in 2014 as appellant was an assignee on AWA’s claim. It sought to recover from the directors who authorised the May dividend on the basis of the decision to distribute dividends was a breach of a creditor duty.
WHAT IS THE CREDITOR DUTY?
DC: [Slide 7] What is the creditor duty? It was described in general terms in this way by Lord Briggs “A duty on the part of the company director to consider or act in accordance with the interest of creditors when a company becomes insolvent, or when it approaches or is at real risk of insolvency.” There are a few permutations and alternatives there but let's start for present purposes with that broad definition or understanding of creditors duty and we will whittle it down a little bit as we go along. Importantly, it was common ground before the UK Supreme Court that the duty was owed to the company and not the creditors directly. It was sourced from common law, not statute.
CONTENTIONS BEFORE THE UK SUPREME COURT
DC: [Slide 8] The respondent directors had argued before the Supreme Court that the United Kingdom Court of Appeal was wrong to conclude, firstly, that the creditor duty existed at all, that is the common law of the UK should not recognise it. Even if it did, they argued it was inapplicable to the payment of the dividend which was otherwise lawful in the sense that I described. Alternatively, they argued that the duty could not be engaged where there was no actual or possibly imminent insolvency.
3 PRINCIPAL ISSUES
DC: [Slide 9] The Lord Justices of the Supreme Court in various judgments consistently identified three principal issues which had to be considered and resolved given those contentions.
The first was whether there was a rule at all. That is, in these circumstances in terms of the company, the directors’ duty to act in good faith, in its interests and of its creditors as a whole.
The second was, if so, what is the content of the duty? Thirdly, if so, when does the rule apply or duty when is the duty triggered?
In terms of the format of this presentation, I will outline for you what the UK Supreme Court said on each of those principal issues. Matthew will identify the Australian position on those same issues.
Since the High Court of Australia decision in Cook v Cook, the United Kingdom appellate court decisions are not binding in Australia and they influence our law only to the extent that they are reasonably persuasive and consistent with the Australian law. That should be borne in mind as I tell you about the decision of the UK Supreme Court.
I will adopt the description and enumeration of the issues appearing in the judgment of Lord Briggs, with whom Lord Kitchener agreed. Lord Hodge also agreed but provided his own reasons. There were five judges in this appeal. There were four sets of reasons and the reasons run to 144 pages. What I am going to do cannot be a substitute for a close, careful analysis of reasons themselves. I intend to give you an overview or a guide to the reasons, highlight particular passages that I think are important to the understanding of the issues. The slides will be detailed. I do not expect you to read them and I do not want to distract you from my presentation. They will be provided to you in due course to consider at your leisure.
[Slide 10] By way of context, these types of arguments appear against statutory background. We can see on this slide and the next slide, the comparison between 172 of the Companies Act in the UK and 181 which is enforced in Australia. They are comparable but, of course, they are not vertically analogous. You will see in 172 that there is no express mention of creditors. So that is not something that expressly is required to be taken account, which is why the article was developed in the UK Supreme Court the way it was, being a common law obligation and not a statutory one.
[Slide 11] The other sections of importance, by way of context, are those on the screen now, section 214 of the Insolvency Act 1986 in the UK and to compare the situation in Australia as near as possible is s 588G in the Corporations Act 2001 which deal with similar but perhaps different things.
IS THERE A COMMON LAW DUTY?
DC: [Slide 12] I have to deal with these things efficiently so I will move on to issue one. Is there a common law creditor duty? The answer in a word is ‘yes’, there is. Unfortunately, the answer to the question “why?” does not have a single word answer. [Slide 13] But, the best summary I find is that which appears at paragraph 246 from the reasons of Lord Justice Hodge. What is important to pick up here is that the justification is not premised on there being a transfer of some proprietary interest. As the Lord Justice identified, there is no such transfer. What does justify the fiduciary duty to consider the interest of creditors is what is described as a shift in relative economic interest. It is that shift which is said to give rise to this fiduciary duty.
So, stepping back for a second. When the company is solvent there is no fiduciary duty on the part of directors to consider the creditors interests. But at some point, when there is a shift, being what is called economic interest, the creditors become vulnerable. It is that vulnerability which is said to be the justification for imposing this fiduciary regime on directors. That is done, or the UK Supreme Court said it is done, even though most creditors are volunteers in a sense of they entered the transaction with the customers voluntarily. So, they freely accept the risk of insolvency.
[Slide 14] Looking at the reasons of Lord Briggs, which are very detailed on this and other issues, the analysis starts at paragraph 139 where His Lordship recognises that there has been a change in the law and the change is distinctly put by reference to the Salomon case. He identifies at the end that a company is no longer seen as an abstract equivalent of its shareholders and that the law has moved away from the law of interest of others in relation to a company's affairs.
[Slide 15] He goes on to refer to what is called a third justification, by way of context that is in reference to a justification in the case of Kinsela which appears on your screen. There are three potential justifications for the existence the creditor duty. Lord Briggs favoured that in Kinsela. You will see in the passage on the screen that he describes it as not an abusive language to describe creditors as “…having the main economic stake in the liquidation process which may be triggered by insolvency, and therefore as persons whose interests must be taken into account (albeit not necessarily as paramount) by the company's fiduciary managers” by the directors.
[Slide 16] Another justification which we can deal with briefly for recognising the duty is that it is consistent with s 214 of the Insolvency Act which I mentioned before but which of course has limited application in Australia. But nevertheless, that was a consistency of principle of approach was a basis that His Lordship identified for recognising its existence in the UK.
[Slide 17] At 151 of his reasons there is a discussion about the development of the law. There was a choice that had to be made in the case of Wincham and West Mercia. Just for background, Wincham was a case decided in 1878 by the Master of the Rolls where it was held that directors were not trustees, the creditors of the company and the creditors had no greater rights than directors, than other members. That was a case firmly seized by the respondents to argue against the proposition that the court should recognise that creditors duty. West Mercia on the other hand was a case in 1988, so 110 years after Wincham which did recognise the creditor duly, it was a Court of Appeal decision. [Slide 18] We see in this passage from Lord Briggs that there has been a recognised change in the law, consistent perhaps with a change in societal attitudes. It is the latter case that is one to recognise creditor duty which must have been preferred.
[Slide 19] Another reason that His Lordship gives for upholding the existence of the creditor duty, which he describes as compelling, is that there is a long line of authority in the English courts, but in particular in Australia and New Zealand, which affirm the existence of the duty as settled law, albeit with the uncertainties that he identified and which I will touch upon in due course. He described it as far from an area of conflict of authority. At this point, given the reference to Australian law, it is convenient for me to hand over to Matthew. He will speak to you about the Australian law in the instance of creditor duty.
AUSTRALIAN AUTHORITIES ON CREDITOR DUTY
Matthew Jones (MJ): Thank you, David.
[Slide 20] In Australia, the creditors duty is recognised in three cases, which Paul identified in his opening remarks: Walker v Wimborne, Nicholson v Permakraft (NZ) Ltd and Kinsela v Russell Kinsela Pty Ltd (in liq). I will run through the facts and issues in each of those cases in that they instruct as to what the content of the duty is, which I think will be issue three, adopting Lord Brigg’s numbering.
[Slide 21] Walker v Wimborne, a liquidator claimed certain transactions were not made by or in the interest of the company, a $10,000 payment to a member of the corporate group. It is important that was under a particular challenge. Justice Mason, as His Honour then was, disagreed with the finding by the primary judge that it was a justification for the transfer that it was. And those words are taken…I will tell you briefly. It began indeed, the emphasis by the primary judge to the circumstance that the group derived an adverse implication tended to obscure the fundamental principles that each of the companies was a separate and independent identity. It was the duty of the directors to consult its interests and its interests alone aligned. In this respect, it should be emphasised that the directors of the company in discharging their duty to the company must take into account the interests of its shareholders and creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. So is a brief statement where the focus is actually on members of a corporate group.
[Slide 22] Nicholson v Permakraft, a New Zealand decision, is a case about whether a corporate restructuring was within power and carried out honestly. The court found that it was. Justice Cook gave the celebrated discussion on directors duties which included the passages on the slide. His Honour considered that translating the business ethics obligation, which is up there, “into our legal obligation, accords which are now pervasive concepts have a duty to a neighbour, and the linking of power with obligation.” So, a policy consideration. But the other justices did not decide the issue. Justice Richardson noted caution. In fact, held at that time, I think in 1986 or there abouts, in New Zealand there was no duty on directors to have regard to the interests of creditors. His Honour noted that there had been developement in some cases and in academia. But consider this “If the court is to move in that direction, its decision to do so would need to be based on thorough examination of the scheme and purpose of the company's legislation. I prefer to leave that for a case where this question itself a difficult amalgam of principle, policy, precedent and pragmatism must be decided.” Justice Somers considered that this issue did not fall for decision in that case.
[Slide 23] So, so far, an uncertain the framework, but it was picked up in Kinsela by Chief Justice Street. There the directors of a company in financial distress took a lease from the company undervalue. The leasers found a suitable liquidator to the voidable transaction, so a statutory claim, but now the company was plainly insolvent, the prejudice to creditors was obvious and the purchase credited the creditors. The headnote referred to Permakraft as being approved and applied and Walker v Wimborne followed. Now the passages are those that I have touched on already.
The way in which those cases were acquired and followed though was narrow. It was on the issue of whether the shareholders could ratify a breach by directors where the interests of creditors were affected. So, whether the shareholders could ratify a breach that concerns not only themselves but also creditors. His Honour found the shareholders do not have that power, given the directors duty extends “…in an insolvency context”, so not prejudicing the interests of creditors. His Honour clearly recognised the narrow application of the principle there because the judgment recites the caution of Justices Richardson and Somers in Permakraft. But, as Paul says, Kinsela has then been cited numerous times, subsequently, often in relation to the shareholder rectification issue, but also more generally for the statement of principle that there is this creditor duty over in Australia.
I will mention some of those other cases when talking about the timing question later on. That reasoning, which is part of the slide, has been treated as the source of duty in Australia.
[Slide 24 & 25] There has to be concluding words about what the duties are not in Australia. So Spies, again, show the line of authority, and makes clear that this is not a separate duty actionable by creditors. Rather, it forms part of the consideration of whether a direct action in the interest of the company, the company there being both shareholder and creditors in appropriate circumstances, and we are talking about suits by the liquidator or manager of a company.
[Slide 26] Time does not permit me to go through Justice Hayne’s article, but for those who have a particular interest in the field, I commend it to you as an interesting critique of the principle or solution in search of a problem and considering caution as to how useful this principle might be in practice, given the battery of other statutory remedies that are already available. And so, when approaching this issue, maybe for the first time, you might like me start to wonder where could this principle really be applied or the other remedies that capture this type of conduct first.
So, the question is posed, the preliminary conclusion is whether there is a creditor duty in Australia. Short answer, ‘yes’. I have suggested that BTI does not change that. Even though the existence of the duty has been criticised over the years, it has been widely and soundly been accepted for many years. If BTI may lead to change, if anything, it might be on timing, which we will get to shortly.
I will hand you back to David.
CAN THE CREDITOR DUTY APPLY TO THE PAYMENT OF A LAWFUL DIVIDEND?
DC: [Slide 27] That is issue one dealt with. Issue two, can the creditor duty apply to the payment of a lawful dividend? [Slide 28] Again, in the search for economy in an otherwise very long case, the answer in a word is ‘yes’. The reasons are really centred around the content of the UK statutory regime. There is no point to detaining you with the detail of that. [Slide 29] Simply, it is applicable in Australia. The point is though is that it is a separate duty, a creditor duty is a separate duty and it deserves separate consideration. Just because the key dividend payment was otherwise authorised, and not illegal, does not mean you do not have to consider this separate fiduciary duty. There is little point asking Matthew coming up to say one word, so I will say it on his behalf and take the credit if it is right but if it is wrong, blame him. That is the position in Australia too.
WHAT IS THE CONTENT OF THE CREDITOR DUTY?
DC: [Slide 30] Issue three, a much more substantial issue, what is the content of the creditor duty? This is a much more complex question and Lord Briggs in fact starts out is reasoning on this issue by noting the absence of unanimity about the precise content of creditor duty.
[Slide 31 & 32] At 164, he tries to whittle it away and identify as what is not part of the duty. As you can see, he identifies it is not a duty to always treat creditor interests as paramount. In the formulation, he provides a quote that is on screen aligns the what questions with the when question which we will come to. But it is apparent that from this formulation there are a number of fact sensitive inquiries and judgments to be made about prospects. For example, when is there still light at the end of the tunnel? That is as practitioners the difficult questions we would have to answer for advisors, company directors, or perhaps even creditors who are upset about a transaction undertaken by the directors.
[Slide 33] Can I mentioned in passing that this reasoning of the West Australian Court of Appeal in the famous, perhaps infamous, Bell Group (in liq) litigation was referred to approvingly by Lord Briggs and his analysis goes on to further recognise the fact that directors operating in an environment with risk they do not have the benefit as litigation lawyers do or transactional lawyers of being what might be termed ‘Monday morning quarterbacks’, looking at the facts in the calm of your office after it has all happened and working out whether something was lawful or appropriate.
[Slide 34] His Lordship recognised there was a need not to place a fetter on directors exercising their business. [Slide 35] The critical passage to my mind is 176 of Lord Briggs’ reasoning. Here, he identifies what the creditors duty is. He described it in terms that are not all that onerous. It is “…a duty to consider creditors’ interest, to give appropriate weight and to balance them against shareholders’ interests where they may conflict. Circumstances may require the directors to treat shareholders’ interests as subordinate to those of the creditors.” That, of course, offers an answer in principle but no real practical guidance.
[Slide 36] The passage continues on this slide. This last sentence, I thought was interesting where he says “It will depend upon a realistic appreciation of who, as between creditors and shareholders”.
One can imagine a situation where a company might be verging upon insolvency to try and get neutral term but has an enormous amount of share capital, but relatively small, unpaid creditors. It is interesting, I think, that we have an absolute proposition put by the UK Supreme Court that even though the shareholders in that scenario stand to lose more money, their interest may need to be subordinated to those of the creditors. Something to reflect upon.
[Slide 37] Lord Hodge put it this way. He described it as a duty to the company to have proper regard to the interests of its creditors and prospective creditors. There are two to things emphasise there. “Proper regard”, there is no explanation of precisely what that means. His Lordship extends the duty not just to creditors, being creditors existing at the time of a particular transaction, but to prospective creditors, the duty is enlarged in his mind.
[Slide 38] At paragraph 227, he identifies Lord Briggs’ the duty to act in certain circumstances in the interest of a company’s creditors and not just to consider but to act in the interests which is perhaps consistent with Lord Briggs’ statement about in certain circumstances the interest of shareholders are subordinated to those of creditors.
[Slide 39] But then it seems Lord Hodge gets more strident still. At paragraph 231 of his reasons he identifies that in certain circumstances the directors are required to give priority to the interests of the company's creditors when they are in conflict with the interests of the company's shareholders.
[Slide 40] He goes further still at paragraph 247(iv) where “…the company is irretrievably insolvent, the interests of the creditors becomes a paramount consideration in the directors’ decision making.” In my mind, that goes substantially further than Lord Justice Briggs who in the passage that I took you to in respect of issue one, he said that even in insolvency directors interests are not necessarily parallel.
[Slide 41] In another passage, at 175, he says this “…the recognition does not go so far as to render creditors interest necessarily in parallel with insolvency”. So even though Lord Hodge professed agreement with Lord Briggs, we have apparent disagreement, or at least inconsistency, on this pretty important topic of what the contents of the creditors’ duty is.
[Slide 42] Then, to introduce the third member, President of the Court, Lord Reed’s reasons. He describes what he calls the West Mercia duty but that is his term for the creditor duty but he uses them interchangeably, in these terms. But importantly, towards the end of paragraph 77, he describes the interests of shareholders as dropping out of the picture and the company's interests can be treated as equivalent to those of the creditors alone. Now, on one reading that language is even stronger than the ‘paramount’ consideration language of Lord Hodge. If something is a paramount consideration it does not mean you ignore other things. For example, shareholders’ interests, you consider them but creditors’ interests are paramount and given more weight. [Slide 43] But, the dropping out of the picture description, or a description of the content by Lord Reed, suggests that shareholder interest can be ignored totally. That, to my mind, appears to be the introduction of another inconsistency in the test or the description of the duty between the members of the UK Supreme Court.
[Slide 44] Of course, as practitioners know, there is always a grey area. It is not immediately apparent that a company has become insolvent. There is a time when a company borders on insolvency or immediate insolvency. In no circumstances, Lord Reed identifies what the directors have to do. In a way identified in this passage. Again, no practical guidance given about the balancing exercise, that is understandable, given the context and content of this particular case.
[Slide 45] He identifies later in the paragraph 81 of his reasoning a general rule. If you can imagine the scale as the company becomes more powerless, the interest of the creditors becomes more dominant and more weight is given to their interests.
At this point, I will ask Matthew to come back and identify the content of the duty from the Australian perspective.
MJ: Thank you David.
WHAT IS THE CONTENT OF THE CREDITOR DUTY IN AUSTRALIA?
MJ: [Slide 46] That duty is, as you might have seen consistently in some passages from BTI, that the content of the duty is to take into account the interests of creditors as part of the assessment of what course of action is in the best interest of the company, when it is engaged of course. Now, what are the sorts of examples? Where directors are faced with a choice between potentially competing solutions to potential insolvency, on the one hand it might be trading on to try to save the company, take some further risk to try to save the company, or alternatively to end the company's operations because you have tensions in these circumstances. The shareholders may want any remaining funds that can lawfully be paid out to be paid out as dividends, or the creditors may want the haemorrhaging to stop and for cash to be used to pay them. Shareholders might be more inclined to take further risks to salvage what can be salvaged but creditors may not be so interested. So, there are a few possible tensions or interrelated concepts that I put on the slide about how it might work in practice, I feel that might be the most useful thing.
David identified passages in the BTI judgment which spoke of a purpose of corporations being to take appropriate risks to generate economic benefits. Directors might see the credit industry as a disincentive to risk taking because if a risk is taken and it materialises they may feel like such a duty may expose them to claims whether good or bad. However, I suggest what the duty really goes to is informing the question of whether a decision was objectively reasonable or not. The Corporations Act is replete with powers that must be exercised for the purpose of which they were given. So, in good faith, for a proper purpose and the business judgment rule is a particular example of that. So as part of the statutory duty of due care and diligence, s 180 subsection 2, provides that the director is taken to have met the requisite standard if the judgment was made in good faith and for a proper purpose without a material personal interest, with proper information and with the rational belief that the decision is in the best interests of the company. So, if it was a properly formed rationally defensible decision. The business judgment rule in Australia applies to the equivalent duty as a common law and equity as a statutory duty. So, I would suggest to this one. And so, where the creditors’ duty really matters in practice is the last two elements of the business judgment rule. The rational belief as to the sense of the decision and the reference to adequate information, so the directors’ decision must be objectively reasonable. As emerged in Bell v Westpac, if there are many creditors of different companies that need to be taken into account, the various interests of those creditors must actually be taken into account. This arose in that case in the New South Wales Court of Appeal called [in audible]. There must be the level of mental application of an intelligent and honest person in the directors’ position.
[Slide 47] What does all this really mean in practice? Directors do have decisional freedom. A decision that is made in a proper manner to seek to advance the interests of the company in good faith should still be protected. Decisional freedom is relatively broad. Directors’ duty is negative, it is not prohibitive. It is within power, usually. We would of course be asked what does this mean in day to day work as a litigator or an advisor. I suggest what it means is that a decision making process, if there is any risk of insolvency because of the timing question, the practical approach would be that the decision making process should be recorded so it can be dependent later. That is because the consideration of the creditors’ interests should be explicit and genuine. If there is a record of a decision which merely considers the shareholders’ interests that would tend to demonstrate a failure to consider the creditors at the appropriate time. It cannot merely be a lip service to the interests of creditors, it must be a good faith decision but within a range of decisional freedom. So, is anything likely to change in Australia because of BTI? I would suggest not. Again, it is probably timing which we will come to in a moment.
Thank you David.
DC: Thanks Matt.
WHEN IS THE CREDITOR DUTY ENGAGED?
DC: [Slide 48] The next question, as you can see on the screen, is when is a creditor duty engaged?
[Slide 49] There is some more context for this issue because before the UK Supreme Court the appellant needed to show that the creditor duty was engaged. Whenever there was a real risk that the company may in the future become insolvent and it needed to succeed on that contention because, as I described when setting out the facts, this company AWA was not insolvent. The dividend was paid from the equity side. It was on the brink of insolvency and had these large contingent liabilities such that it could be said that there was a real risk of it being insolvent sometime in the future. That is the factual context in which this particular argument was made and determined by the UK Supreme Court.
[Slide 50] Lord Briggs again starts by answering this question by observing that there is no clear guidance either as to the end questions that were referred to by the parties. He said “Dicta can be found to support any number of competing alternatives, from real risk of insolvency as the earliest to actual solvency at the latest”. His Lordship had in regard to a case in Australia called Grove v Flavell which was a 1986 decision of the South Australian Full Court. That was a case where the Court adopted a real risk of insolvency test as part of its ratio or reasons for its decision.
Grove was followed by the New South Wales Court of Appeal in [inaudible]. The real risk of insolvency test found favourably with one member of the United Kingdom Court of Appeal in BTI. Nevertheless, Lord Briggs regarded the Grove v Flavell case as persuasive and declined to follow.
[Slide 51] He rejected the real risk of insolvency as the trigger for the creditor duty with paragraph 191. He expressed his reasons for doing so with that passage. He then stated what he regarded to be the true principle in paragraph 192 [Slide 52]. This passage really reflects the conclusions that have already been considered on issue one and issue three and provides a conclusion on the issue forward. So, it brings all those principal issues together, in my view. What in essence His Lordship is saying is that creditors do not have a sufficient interest, or at least a sufficient disparate interest to those of shareholders, which justifies the imposition of the creditors’ duty when there is a real risk of insolvency, something more acute is required to give rise to that interest and therefore give rise to the duty.
[Slide 53] You would be forgiven for thinking that there is a degree of semantics in this. I will make some observations about that in due course. In any event, the dividing line that the Court drew was between a real risk of insolvency being insufficient to trigger the existence of the duty but a probability being sufficient.
[Slide 54 & 55] There is, in the reasons, I think an interesting because it is timely, recognition of how practically this question would have affected people doing business during the recent pandemic, particularly those of tourism and hospitality. I thought it was interesting to see how something like that affected the reasons of the UK Supreme Court.
The other thing that Lord Briggs acknowledges in his reasons is the fact that companies are risk taking vehicles. People accept risks via corporations that they would not take personally, that is the precise point for the existence of companies and there are high risk or speculative companies which may have a risk of insolvency throughout their lives because they undertake speculative investments or engage in new technology or developing technology. So, to have a trigger that was in the terms of a real risk of insolvency would in fact deter people from taking risks that need to be taken for businesses to succeed and risk be taken and all the societal benefits that can bring.
[Slide 56] At paragraph 203 he sets out that his preferred formulation is, a formulation which for the record was agreed by Lord Kitchener and Hodge. There are two triggers. The first concerns the question of insolvency or recording insolvency and it being imminent. The second alternative is concerned with probability of insolvency, or administration of insolvent liquidation. This is a formulation which is precise in language that, I think, is difficult to apply in practice. When we think about probabilities, so the probability of insolvent administration or insolvent liquidation, something is probable if it is more likely to occur than not to occur, not a very high bar. I think it is curious that Lord Justice Briggs dispenses with the real risk of insolvency trigger as being too remote and premature. When the trigger that is in fact adopted as an alternative may well have the same problems, something could be probable, but not inevitable. [Slide 57] There is of course a difference between a probability of 51% or barely probable and a probability of 90% or very probable. So, thinking back to the language that His Lordship used earlier, it is only to ask a rhetorical question, if there is only a 51% probability of insolvency isn't there still light at the end of the tunnel? If so, doesn't that trigger conflict with what His Lordship said at paragraph 164 about when he was discussing the justification for the creditor duty? Perhaps the answer is one of weight, as the probability increases the regard that has to be had to the creditors’ interest increases. But in my view, this formulation, which was a preferred one by a number of members of the UK Supreme Court, will be a catalyst for further litigation.
[Slide 58] Of course, one has to reconcile this trigger with recognising the duty in the first place. Lord Reed attempted to do that at paragraph 83 [slide 59] where he talks about the distribution and risk of loss and that there is not this shift in economic interests, which was said to be the justification for the duty just because there is a real risk of insolvency. Matthew has a few things to say on this so I will flick through a few slides. As I said, they are there for you to consider in due course if you wish to do so. I will hand you back to Matthew.
MJ: Thank you.
THE TRIGGER POINT IN AUSTRALIA
MJ: As David just told you, Lord Briggs said that a real risk of insolvency is not a sufficient trigger. But at the moment, that is the language of the trigger in Australia. There are authorities saying that if the company is insolvent, or near insolvent, the duty is engaged. However, the more interesting issue I suggest is trying to identify the earliest on which this important and potentially meaningful duty engages. I have extracted some of the descriptions on the slide [63]. Just to keep your minds moving, they are in chronological order, like good junior counsel. To keep it interesting, I will speak in logical order.
The Cassimatis decision, the ‘precarious’ position. ASIC v Maxell 2006, the ‘financial’ position of, similarly, severe risk of harm must be balanced when the financial position is precarious. However, what seems to have dominated the field is Kalls Enterprises, The Empire Strikes Back if we want to be illustrative. The directors must consider the interests of creditors if there is a real and not remote risk that they will be prejudiced by the deal in question. Kalls was in the New South Wales Court of Appeal. [Slide 64] A single judge of the Federal Court in Termite Resources (Justice White), again referring to a “real and not remote risk of insolvency”. But thank goodness for the Full Court of the Federal Court in 2020, Justices Greenwood, Rares and Crawley, taking the language of “precarious”.
What I am saying rather assumes that there is a difference between ‘precarious’ and ‘real’ and ‘remote’ risk. Perhaps ‘precarious’ does indicate that more concerning element than the barely 51%, which ‘remote’ must mean. Reasonable minds could differ whether there is in fact a difference between them. There is no answer here, more raising a potential issue. Could ‘real’ and ‘remote’ risk mean the balance of probabilities? Just doing to do a word search for Kinsella and Kalls with a word search for ‘real and remote risk’ there is a myriad of ways in which that language pops up and there are many. A trademark example of a real and remote risk of confusion could support relief or a real and remote risk of a transfer or breach of trust. These are not creditors duties cases but similar language and there is really very little help in what it means. Perhaps this might be the thing that BTI does that benefits Australian jurisprudence, it might encourage a future court in the inevitable litigation about what this means to reconsider whether such a low threshold is appropriate, or whether something more like an imminent risk should be adopted because there should of course be internal consistency within the law. Maybe something akin to precarious, with its undercurrents, might be a better fit for example with in s 558G of the Act which imposes a liability for insolvent trading with language which is at least a little more measurable, still open for debate. When a company incurs a debt, that is reasonable grounds for suspecting that the company is insolvent and the directives that were at the time there are reasonable grounds for suspecting.
David will return to cover a few issues.
UNANSWERED QUESTIONS
DC: [Slide 65] Just quickly by way of conclusion, issues one, three and four in BTI are the consideration and judgment of law of creditor duty links beyond that undertaking in Australia today. On issue one, the UK Supreme Court has offered a much more detailed analysis of the issue than has hither to been undertake into Australia, at least so far as we are aware. We have today considered the Supreme Court’s answers to three important issues raised by the appeal of BTI. The separate judgments of their Lordships were made and carefully composed. I note that argument in this case was heard in May 2001 with judgment in October 2022. Obviously, careful consideration was given to the reasons by the members of the court. But of course, given the fact that facts in the case were so narrow and, as their Lordships identified, the dispositions of the case were fact sensitive. The case offers very little practical clarity as to the content of the duty, in particular given the lack of cohesion of the judgments describing the content as identified, but also when it is triggered, and the difficulty in differentiating between a real risk of insolvency and the probability of an insolvent administration, what is the difference? The answer will probably depend on the facts of the particular case.
[Slide 66] BTI leaves a number of questions unanswered as well, at the end of [inaudible] did not arise. To which creditors did the duty owe? Is it future creditors? What about secured creditors if they are going to be paid in full? Is there any transfer of economic interest to them?
Are all creditors to be treated homogenously or are their interests each to be separately considered individually?
Who can obtain relief? Is it the creditor at the time a breach occurred or subsequent creditors after the transaction?
How can it be enforced? Is it only via a liquidator or regulator bringing on proceedings on behalf of creditors?
These and other questions must be addressed if the law is to develop to a cohesive stage and to be useful to practitioners for the purposes of providing practical advice to our clients.
[Slide 67] On that note, Lady Arden said this at paragraph 448 of her reasons that need for the law to be clear in every respect and so that it can be ascertainable and apply in real time by busy directors making difficult decisions in difficult circumstances. Given the unanswered issues and inconsistencies in BTI, it is unlikely that this decision achieves at least complete certainty for directors and practitioners. Time will tell whether BTI will be considered that persuasive and therefore authority in Australia, particularly given the lack of consistency and reasons on issue three and its inconsistency with our own domestic jurisprudence which in some parts influences decision.
There is at least some scope, as Matthew has alluded to, for an argument by a director who needed to make the real risk of insolvency trigger, that the preferred carveout should now be abandoned in favour of triggers adopted by the UK Supreme Court in BTI. That may be to a practical advantage of a director or directors in a particular case. The reasons here might also provide an apt opportunity for the grant of special leave in an appropriate case. The High Court can then itself decide these issues and potentially others for itself and hopefully provide more clarity for Australian practitioners. BTI though is significant because it is a first step in the development of principles which will be applied to different facts over the years that come and from that practical guidance will hopefully be obtained so that when we are advising clients we can know that these principles have been applied in particular facts in a particular way and we can advise the clients accordingly.
Thank you very much for your attention. I will hand back to Paul.
PM: Thank you David and Matthew for their insightful discussion on the BTI decision. It is now 1835 so we won't deal with any questions. I thank both of the speakers. I trust you have enjoyed the seminar and look forward to seeing you next one. Thank you.
Liability limited by a scheme approved under professional standards legislation