DIRECTOR’S DUTY TO COMPANY’S CREDITORS

December 2022

The recent UK judgement of BTI 2014 LLC v Sequana SA and others revives the issue as to whether a director’s duty should extend to consider and act in the interests of the creditors of the company.  In Sequana, the director’s fiduciary duty to act in the interests of the company in good faith be modified and extended to require the director to consider and act in the interests of the company’s creditors when the director knows, or ought to know, that an insolvent liquidation or administration of the company is “probable”.  Indeed, section 172(1) of the UK Companies Act sets out the general duty of a director to promote the success of the company for the benefit of members and such duty is expressly subject to the qualification contained in section 172(3) in that “The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company”.  In other words, a director’s duty to consider and act in the interests of the company’s creditors has already been codified in the UK arena.

In Hong Kong context, while the drafting of the Companies Ordinance with regard to director’s duty is different, section 465 only names the duty to exercise reasonable care, skill and diligence.  Subsection (2) of section 465 further elaborates the meaning of “reasonable care, skill and diligence”. That section 465 plus other common law rules govern the Hong Kong position and a director’s duty to creditors is yet to be codified. However, in view of Sequana and the Hong Kong Court of Final Appeal authority of Moulin Global Eyecare Holdings Ltd v Lee Sin Mei ruled in 2014,it is not surprising for the court to give higher weight to the director’s duty to the company’s creditors in future. If the Sequana approach is really adopted, the extent and scope of such duty to creditors have to be further defined.  This will give rise to the battle of creditor’s interest and shareholder’s interest, for example, when dividend is declared before the insolvency of the company. How and when the director’s duty to creditors arises have to be made clear before such duty can be fairly imposed.  If a director is obliged to consider and act in the interests of the company’s creditors when the director knows, or ought to know, that an insolvent liquidation or administration of the company is probable (re: Sequana), how if the company is only facing financial difficulty and it may or may not end up with insolvency or liquidation?  How can the director truly comprehend each and every creditor’s interest and how if any liability is not yet crystallized and only contingent initially?  What relief is available if there is any breach of such duty?

All these unresolved points of law would require a local landmark case to clarify.