Key takeaways for Australian directors
BTI is relevant in an Australian context because it reinforces that the “creditor duty” – something long recognised by successive Australian case law – applies to Australian company directors. There are however two important issues that are still unclear.
Special leave is currently sought before the High Court in Australia in a matter concerning directors’ breach of section 180 of the Corporations Act by failing to act with reasonable care and diligence in considering whether the payment of dividends would have complied with section 254T of the Corporations Act. That section says a company must not pay a dividend unless the payment of the dividend does not materially prejudice the company's ability to pay its creditors.
Until we have greater guidance from the Court, directors should bear in mind the following practical considerations:
1. As a starting point, if there is any real and not remote risk that a company is insolvent, then directors should give proper consideration to the potential impact of any transactions entered into by the company on creditors and be in a position to provide evidence of that consideration.
2. Directors should exercise their best judgment when considering and apportioning weight to creditors’, and shareholders’ interests having regard to the nature of their company’s business. Useful guidance can be found in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, where Chief Justice Street observed:
“Courts have traditionally and properly been cautious indeed in entering boardrooms and pronouncing upon the commercial justification of particular executive decisions. Wholly differing value considerations might enter into an adjudication upon the justification for a particular decision by a speculative mining company of doubtful stability on the one hand, and, on the other hand, by a company engaged in a more conservative business in a state of comparable financial instability. Moreover, the plainer it is that it is the creditors' money that is at risk, the lower may be the risk to which the directors, regardless of the unanimous support of all of the shareholders, can justifiably expose the company.”
3. The greater a company’s financial difficulties and its proximity to insolvency, the more directors should take professional advice to assist them to take into account and, potentially, prioritise the interests of creditors above shareholders (where there is any conflict). When a company is insolvent, the interest of creditors – at least with respect to shareholders – will likely be paramount.
4. Directors should, as ever, properly inform themselves about a decision that may affect the interests of creditors to the extent they reasonably believe to be appropriate.