Sequana case sets alarm bells ringing for company directors wanting a sleep-easy retirement
Not only was the recent Supreme Court decision in BTI v Sequana “momentous” for company law in relation to the scope of the creditor duty and when it is triggered, it is also an uncomfortable reminder that directors can face claims (whether from creditors, regulators or the company itself via its administrators or liquidators) many years after they have left a company.
In May 2009, the directors of a company called Arjo Wiggins Appleton Limited (“AWA”), authorised payment of a dividend of €135m - nearly all its net assets - to its sole shareholder, Sequana SA.
At the time the dividend was paid, AWA was not trading, but it was solvent. The payment of the dividend complied with the statutory requirements relating to distributions under the Companies Act 2006 and common law rules about the maintenance of capital. However, through company restructuring, AWA had inherited long term contingent liabilities, of an uncertain amount, relating to clean-up costs arising out of historic pollution incidents in the USA. This meant that there was a risk that AWA might become insolvent in the future.
In October 2018, almost ten years after the dividend was made, these liabilities eventually materialised, pushing AWA into insolvent administration.
Claim against the directors
The assignee of AWA’s claims, BTI 2014 LLC (“BTI”), sought to recover an amount equivalent to the dividend from AWA’s directors on the basis that their decision to make the dividend had been made in breach of the directors’ duties to act in the best interests of the company which, BTI alleged, involved taking into account the interests of AWA’s creditors (the “creditor duty”) once there was a “real risk” of insolvency.
The High Court and the Court of Appeal found that the creditor duty had not been triggered at the time when the dividend was made.
Supreme Court’s finding
BTI appealed to the Supreme Court, arguing that the creditor duty arises where a company is solvent but there is a real (but not remote) risk of its becoming insolvent at some point in the future.
The Supreme Court dismissed BTI’s appeal, finding that a real risk of insolvency is not sufficient to trigger the creditor duty and that the creditor duty is engaged only when the directors know or ought to know that the company is insolvent or bordering on insolvency, or that an insolvent liquidation is probable. At that point, directors must consider and give appropriate weight to the interests of the company’s creditors as a whole, and balance them against the interests of its shareholders where they may conflict. Once it becomes inevitable that the company is going to become insolvent, the interests of its creditors should become a paramount consideration in directors’ decision making.
The creditor duty was not triggered in this case because at the time of the dividend in May 2009, AWA was not insolvent, nor was the insolvency imminent or probable. While the outcome may have pleased the directors, the fact that they faced claims a decade after the event must have been a source of dismay (particularly if there was no D&O cover in place at the time the claim was made).
Can retired directors ever sleep easy?
One of the main sources of claims against directors is in insolvency by a company’s liquidators or administrators. As the Sequana case shows, such claims can be a long time gestating and may well surface years after a director has left a company.
Under the normal limitation rules, claims against directors can be brought up to six years from the date of the alleged breach or three years from the earliest date on which the claimant has the requisite knowledge to bring an action for the alleged breach (which could be much later). Where the claim against a director is to recover an unlawful transfer of property by the director to a company he controlled, or where the allegation against the director is of a fraudulent breach, no limitation period applies at all.
How can retired directors sleep easy with the knowledge that their exposure to claims does not expire with their tenure?
D&O policies provide claims made cover. They respond to claims made during the policy period. This makes it vital that an unbroken chain of D&O policies is bought since a claim made when there is a gap in the chain will not be covered - leaving directors exposed. Directors ordinarily have control over this as they are likely to have some say in the purchasing of cover.
The problem for directors comes when they leave the company. Once retired they have no control over subsequent renewals of the company’s D&O cover and hence no control over the maintenance of an unbroken chain of D&O policies.
One solution to this is to make sure that the company’s D&O policy has built in run-off protection for retiring directors. Most policies contain run-off provisions for retiring directors that might look like this:
“In the Event that the Policyholder does not renew this policy, and only in respect of [Directors] who retire prior to the date of non-renewal, this policy shall continue in place for a period of six years from the date of non-renewal PROVIDED THAT the policy shall only apply to claims arising from Wrongful Acts prior to the date of retirement of the Insured person.“
This provides some comfort to retiring directors, but that comfort is limited. Say a director, Director X, retires in 2022 (making the 2022 policy the last one they had a say in). If the 2022 policy is renewed into 2023, the run off provision is not activated. But if the 2023 policy has no equivalent provision and it isn’t renewed, there is no cover from 2024 onwards. From that point Director X could well be sleeping badly since there is no ongoing cover and there is no run off cover for retired directors.
Even if the 2022 policy had not renewed and the run off was activated, it wouldn’t help Director X if a claim (such as the late emerging claim in the Sequana case or a claim alleging fraud for which there is no limitation) were made in 2029 (when the six years of run off had expired).
Instead, in anticipation of possible retirement, a director would be well advised to seek a provision in the company’s D&O policy from year to year that provides run off for retired directors that:
- applies automatically to any director who retires during the year (regardless of whether cover is renewed);
- is for an unlimited period (because some claims are not restricted to a six year limitation period) or at least provides cover that goes beyond the basic six year limitation period (12 years might be a prudent minimum that would have provided protection in the Sequana case).
For directors, reading a D&O policy may well be sleep inducing. However, the longtail nature of claims that can be made against directors, as illustrated in the Sequana case, may be a wake-up call for those who want sleep easy D&O cover in their retirement.
 BTI 2014 LLC v Sequana SA and others  UKSC 25
 Sections 2 and 14A of the Limitation Act 1980
 Section 21(1) of the Limitation Act 1980 and see First Subsea Ltd v Balltec Ltd and others  EWCA Civ 186