When a company is in the so-called “twilight zone” approaching insolvency, it is well-established that the directors’ fiduciary duties require them to take into account interest of creditors (the so-called “creditor duty”). In the recent decision of Stephen John Hunt v Jagtar Singh  EWHC 1784 (Ch), the English High Court examined whether it is necessary to establish some form of knowledge (actual or constructive) of insolvency on the part of the directors for the creditor duty to arise, or whether the fact of insolvency is sufficient to trigger the duty.
The creditor duty was recently considered by the UK Supreme Court (“UKSC”) in BTI v Sequana  UKSC 25 (see our previous update here). In that case, the UKSC confirmed the existence of the creditor duty and gave important guidance on the scope of a director’s duty to have regard to the interests of creditors. The UKSC nonetheless did not reach consensus on whether knowledge of the directors that the company is insolvent or bordering on insolvency is an essential element for creditor duty to arise.
Applying the guidance laid down in Sequana, the judge in Stephen John Hunt proceeded on the assumption that some knowledge component is required before the creditor duty would arise. The judge then held that where a company is faced with a “bet-the-company” type litigation or claim, that is where a current claim or liability is of such a size that the company’s solvency is dependent on successfully challenging that claim, the creditor duty would arise “if the directors know or ought to know that there is at least a real prospect of the challenge failing”.
This decision raises important considerations for directors in assessing their company’s solvency position and the duties potentially owed to creditors where the company verges on insolvency. Particularly, the following points may be of interest to Hong Kong readers:
- In Hong Kong, the creditor duty has also been expressly recognised by the Hong Kong Court of Final Appeal in Tradepower (Holdings) Ltd v Tradepower (Hong Kong) Ltd (2009) 12 HKCFAR 417.
- Following the UKSC’s decision as applied in Stephen John Hunt, the current English position is that for a creditor duty to arise, the directors must know or ought to know that the company is insolvent or bordering on insolvency, or that an insolvent liquidation is probable. This seems to be in line with the Hong Kong position, as expressed most recently in first instance cases such as Cyberworks Audio Video Technology Limited v Remedy Asia Ltd and others  HKCFI 398 and Re China Bozza  HKCFI 1235.
- Furthermore, in the context of group companies, the Hong Kong Court has consistently confirmed that directors will need to consider the interest of creditors of each company in a group separately as to whether the creditor duty arises in respect of that company. This would undoubtedly complicate the situations in which the creditor duty may arise. Directors holding multiple offices within a group may likewise find themselves in conflicted positions due to the diverging interests of different companies within the group.
For more details, please see our blog post on the English High Court’s latest judgment here.
For more information, please contact Gareth Thomas, Partner, Jojo Fan, Partner, Peter Ng, Senior Associate, Grace Lee, Associate, or your usual Herbert Smith Freehills contact.