England & Wales focus • CA 2006 duties are UK-wide • Scotland & Northern Ireland differ • Plain English

When creditors’ interests start to count • wrongful trading • who you may pay • disqualification • the board minute that evidences the decision

• Locate the trigger — understand what the Supreme Court said is, and is not, enough to engage the creditor duty.
• Separate the risks — wrongful trading, preference claw-back and disqualification are three different things with three different tests.
• Record the decision — build a board minute that meets Companies Act 2006 ss.248–249 and evidences what the board weighed.

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• “We think we can trade out of it — is that enough?”
• “Can I repay my director’s loan first?”
• “If I resign now, does that end my exposure?”
• “The bank has my personal guarantee.”
• “At what point do creditors come first?”
• “What should the board minute actually say?”

Start from who the duty is owed to. Companies Act 2006 s.170(1) is explicit: the general duties in ss.171–177 are owed by a director to the company — not to shareholders individually and not to creditors. s.170(3) puts those duties in place of the old common law and equitable rules, and s.170(4) says they are to be interpreted and applied in the same way, having regard to them.

The statutory hook is s.172(3). The duty in s.172(1) — to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole — “has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors”. Note what s.172(3) does not do: it does not say when those circumstances arise, or what the directors must then do.

What the Supreme Court held. In BTI 2014 LLC v Sequana SA and others [2022] UKSC 25, judgment given 5 October 2022, the appeal was dismissed. Lord Hodge at [247](i) held that the fact a company faces a real risk of insolvency is not sufficient to engage the duty. At [247](iii)–(iv) the duty is described as recognising creditors’ economic interests when the company is bordering on insolvency or is insolvent, and once the company is irretrievably insolvent creditors’ interests become a paramount consideration. Lord Briggs at [203] (Lord Kitchin agreeing) would treat imminent insolvency, or the probability of an insolvent liquidation or administration, as sufficient triggers. Lady Arden at [279] records Lord Reed’s formulation at [12]: insolvent or bordering on insolvency, or an insolvent liquidation or administration probable.

The honest limit of that. Lady Arden at [278] records that Lord Reed expressly declined to decide whether it is essential that the directors know or ought to know of that state of affairs. So this page states the trigger and stops there: we do not tell you that a knowledge requirement is settled law, because the Supreme Court did not settle it.

Practical reading. The duty arrives before a formal insolvency process, but not merely because insolvency is a risk. Two opposite errors cost directors money: assuming creditors only matter once a liquidator is appointed, and assuming that any risk of insolvency means creditors’ interests instantly override everything. Neither is what the Court said.

Three conditions, all in s.214(2). (a) The company has gone into insolvent liquidation. (b) At some time before the commencement of the winding up, the person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration. (c) That person was a director at that time. On the liquidator’s application, s.214(1) lets the court declare the person liable to make such contribution to the company’s assets as it thinks proper — the amount is entirely for the court, so no one can tell you in advance what it would be.

The standard is objective, then personal. s.214(4) measures what a director ought to know, ought to conclude and ought to do against a reasonably diligent person having both (a) the general knowledge, skill and experience reasonably expected of someone carrying out the same functions, and (b) the general knowledge, skill and experience that director actually has. Both limbs apply and the higher one bites. s.214(5) adds that “functions” includes functions entrusted to you that you do not actually carry out — delegating the finances does not delegate the duty. s.214(7) catches shadow directors.

The only statutory defence, and read it carefully. s.214(3): the court shall not make a declaration if satisfied that, after the s.214(2)(b) condition was first met, the person took every step with a view to minimising the potential loss to the company’s creditors as he ought to have taken. That is “every step”, not “reasonable steps”, and it is about steps taken, not beliefs held. Genuine optimism is not a step. Obtaining current management information, taking advice from a licensed insolvency practitioner, ceasing to take on credit you cannot meet, and recording each decision are steps.

“Insolvent” here has a defined meaning that includes the expenses. s.214(6): a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for its debts and other liabilities and the expenses of the winding up. s.214(6A) mirrors that for insolvent administration. Boards routinely forget the expenses limb when they run the numbers.

Wrongful trading is not fraudulent trading, and neither is misfeasance. Nothing in s.214 requires dishonesty to be proved: its test is what the director knew or ought to have concluded, measured by s.214(4). Fraudulent trading is a separate section — s.214(8) expressly says s.214 is without prejudice to s.213 — and misfeasance is a further, separate claim again. They have different tests, different ingredients and different consequences. We have not set those tests out here because we did not verify them from the statute for this page, and a half-remembered test is worse than none: if a liquidator raises fraudulent trading or misfeasance against you, take advice on that specific claim rather than reading across from s.214.

What a preference is. s.239(4): a company gives a preference if the person is one of its creditors, or a surety or guarantor for any of its debts, and the company does or suffers anything that puts that person in a better position, in the event of insolvent liquidation, than they would otherwise have been in. s.239(3) lets the court make such order as it thinks fit for restoring the position to what it would have been.

The “desire” element — and the presumption that flips it. s.239(5) requires that the company was influenced in deciding to give the preference by a desire to produce that better-position effect. But s.239(6) provides that where the preference was given to a person connected with the company (otherwise than by reason only of being an employee), the company is presumed, unless the contrary is shown, to have been so influenced. In practice the burden lands on you.

How far back it reaches. s.240(1): the relevant time is 2 years ending with the onset of insolvency for a transaction at an undervalue or a preference given to a connected person (otherwise than by reason only of being an employee), and 6 months for any other preference. It also covers the periods between an administration application and the order, and between filing a notice of intention to appoint an administrator and the appointment. s.240(3) defines the “onset of insolvency”.

The extra insolvency condition. s.240(2): a time within those periods is not a relevant time unless the company was then unable to pay its debts within the meaning of s.123, or became unable to do so in consequence of the transaction or preference — and for a transaction at an undervalue with a connected person, that requirement is itself presumed satisfied unless the contrary is shown.

Repaying a director’s loan account, clearing an overdraft you have personally guaranteed, or settling with a supplier owned by a family member are the textbook fact patterns: connected person, longer look-back, presumed desire. If you are considering any of them while the company is under strain, take insolvency advice on that specific payment before making it.

This is not a claim for money and it does not depend on a liquidator. CDDA 1986 s.6(1) provides that the court shall make a disqualification order where the person is or has been a director of a company that has at any time become insolvent — whether while they were a director or subsequently — or of a company dissolved without becoming insolvent, and their conduct, taken alone or together with their conduct as a director of other companies, makes them unfit to be concerned in the management of a company.

s.6(2) defines “becomes insolvent” to include going into liquidation with assets insufficient for debts, other liabilities and the expenses of the winding up; entering administration; or an administrative receiver being appointed. s.6(3C) includes a shadow director. s.6(4) sets the period at a minimum of 2 years and a maximum of 15 years. We do not publish “typical” periods by conduct type — that is not something we verified, and the range is what the Act actually states.

The words “whether while the person was a director or subsequently” matter: the company can go under after you leave and s.6 still reaches your conduct while you were there.

Minuting is not optional. Companies Act 2006 s.248(1): every company must cause minutes of all proceedings at meetings of its directors to be recorded. s.248(3) makes failure an offence by every officer in default, and s.248(4) provides for a fine at level 3 on the standard scale on summary conviction, plus a daily default fine of one-tenth of level 3 for continued contravention. (We give the level, not a pound figure — the cash value is not something we verified for this page.) s.248(2) requires the records to be kept at least ten years from the date of the meeting — longer than the two-year preference look-back, and longer than most companies’ retention habits.

Authentication is what turns a minute into evidence. s.249(1): minutes recorded in accordance with s.248, if purporting to be authenticated by the chairman of that meeting or by the chairman of the next directors’ meeting, are evidence (in Scotland, sufficient evidence) of the proceedings. s.249(2) then gives three presumptions, until the contrary is proved: the meeting is deemed duly held and convened, all proceedings at it are deemed to have duly taken place, and all appointments made at it are deemed valid.

No witness, no notary, no filing. Nothing in ss.248–249 requires a board minute to be witnessed, notarised, sworn, signed by more than one person, filed at Companies House or made on any prescribed form. The Act requires it to be recorded, kept ten years and, for evidential status, authenticated by the chair. Quorum and how decisions are taken are governed by your company’s own articles — read them rather than assuming a default.

Two things a distress-zone minute must positively capture. First, interests: s.177(1) requires a director interested directly or indirectly in a proposed transaction to declare the nature and extent of that interest to the other directors; s.177(2) allows that declaration to be made at the meeting; and s.177(4) requires it to be made before the company enters into the transaction. Second, conflict authorisation: s.175(6) makes board authorisation of a conflict effective only if the quorum requirement was met without counting the interested director or any other interested director, and the matter was agreed without their voting (or would have been agreed if their votes had not been counted). If the minute does not record the quorum count and the vote on that basis, the authorisation fails.

What a useful record contains. Date, time, place or means of meeting; who attended and who did not; that a quorum was present; any s.177 declaration and, where a conflict was authorised, the s.175(6) quorum and voting basis; the information the board actually had in front of it; the s.172(1)(a)–(f) factors considered — long-term consequences, employees, suppliers and customers, community and environment, reputation for high standards of business conduct, and fairness between members; express consideration of creditors’ interests; the alternatives weighed and why they were rejected; the decision; who does what by when; and the date of the next review. A signature block for the chair is right; a witness block is not.

A minute is evidence of steps, not a substitute for them. The s.214(3) defence is about what you actually did. A beautifully drafted minute recording a decision to keep trading, with nothing behind it, helps nobody. Take the step, then record it.

Companies Act 2006 — UK-wide. s.1299 provides that, except as otherwise provided or where the context otherwise requires, the Act extends to the whole of the United Kingdom. So ss.170–177, s.248 and s.249 apply in England & Wales, Scotland and Northern Ireland.

Insolvency Act 1986 — not Northern Ireland. s.441(1) extends only a short listed set of sections to Northern Ireland, and s.441(2) provides that, subject to that, nothing in the Act extends to Northern Ireland or applies to companies registered or incorporated in Northern Ireland. So s.214, s.239 and s.240 do not apply there, and no period on this page may be carried across.

Scotland — the preference sections are excluded. IA 1986 s.440(2)(a) expressly excludes ss.238 to 241 from the first Group of Parts as it applies to Scotland. The preference definition, the connected-person presumption and the 6-month / 2-year look-back therefore have no application in Scotland. Scotland has its own, differently drafted regime, which we have not set out here and whose sections and periods we do not state. Take Scottish advice.

Disqualification — England, Wales and Scotland. CDDA 1986 s.24(1): the Act extends to England and Wales and to Scotland. s.24(2) extends only s.11(1)–(2A) to Northern Ireland, with a further limited extension under s.24(3). The 2-to-15-year range in s.6(4) is therefore an England, Wales and Scotland figure, not a Northern Ireland one.

Ireland, the United States, Australia and Canada. None of this applies. Lady Arden noted in Sequana at [248] that Delaware and many other US states, and Canada, have taken the view that directors owe no duty to creditors when a company becomes insolvent, while Australia and New Zealand have taken a different approach. Do not treat the creditor duty as a general truth outside the UK.

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This is general legal information, not legal advice. If insolvency is in prospect, take advice from a solicitor or a licensed insolvency practitioner without delay — the options available to a company are outside the scope of this page.

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