The rule in West Mercia

LORD BRIGGS (with whom Lord Kitchin agrees):

....

Issue 1: is there a common law creditor duty at all?

126.                   Although going well beyond what they needed to do to shield their clients from liability, Mr Laurence Rabinowitz KC and Mr Niranjan Venkatesan for the director respondents mounted a full-frontal attack on the very existence of the creditor duty, at the heart of which was the submission that the only attempted justifications for its existence were contrary to settled principle. It is therefore convenient first to identify the supposed justification for the creditor duty, as revealed by the leading authorities. At paras 125 to 191 of his judgment in the Court of Appeal, David Richards LJ carried out a magisterial review of the United Kingdom and Commonwealth authorities on the creditor duty, the detail of which it would be superfluous for me to do otherwise than commend. They begin with Walker v Wimborne (1976) 137 CLR 1 and end with Bilta (UK) Ltd (No 2) v Nazir [2015] UKSC 23; [2016] AC 1. Three alternative potential justifications for the creditor duty may be said to emerge, although only one of them has occupied the centre ground as a matter of binding authority, at least in the United Kingdom. None has been free from academic criticism.

127.                   The first is that incorporation with limited liability is a privilege which carries with it an obligation to have regard to the propensity for the directors’ decision-making to damage the interests of creditors as the company nears insolvency. Business ethics make it appropriate for directors to consider whether what they do will prejudice the company’s practical ability promptly to pay its debts. This was the justification relied upon by Cooke J in Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242, 249-50. He said that to translate this aspect of business ethics into a legal obligation:

“accords with the now pervasive concepts of duty to a neighbour and the linking of power with obligation.”

128.                   This supposed justification may be said therefore to be a development of the neighbour principle underlying the law of negligence. It was in part based upon dicta of Templeman LJ in In re Horsley & Weight Ltd [1982] Ch 442, 455, and was cited with apparent approval by Street CJ in the Kinsela case although, as will appear, he provided his own separate justification.

129.                   The second justification is that the company itself owes responsibilities to its creditors once it is insolvent, so that the directors as the custodians of the conscience of the company are duty bound to the company to see that it performs those obligations. The notion that insolvent persons have responsibilities to their creditors goes back to Roman law, in the Lex Paulina. This basic principle has long since been given effect to by statutory provision, both in England and Scotland, and is now to be found reflected in part in section 423 of the 1986 Act. It would not be right to say that either individuals or companies now owe duties to creditors which are strictly fiduciary in nature, but the concept of the existence of some responsibility towards creditors has survived. In Winkworth v Edward Baron Development Ltd [1986] 1 WLR 1512, 1516; [1987] 1 All ER 114 at 118 Lord Templeman gave this reason for finding that a director had acted in breach of duty to their insolvent company:

“But a company owes a duty to its creditors, present and future. The company is not bound to pay off every debt as soon as it is incurred, and the company is not obliged to avoid all ventures which involve an element of risk but the company owes a duty to its creditors to keep its property inviolate and available for the repayment of its debts. The conscience of the company, as well as its management, is confided to its directors. A duty is owed by the directors to the company and to the creditors of the company to ensure that the affairs of the company are properly administered and that its property is not dissipated or exploited for the benefit of the directors themselves to the prejudice of the creditors. … These breaches of duty would not have mattered if ... [the directors] had been able to maintain the solvency of the company and to see that all its creditors were paid in full.”

130.                   The third justification, which has held centre stage, and which was the main bone of contention between counsel in this appeal, was that supplied by Street CJ in the following well-known passage in the Kinsela case 4 NSWLR 722, 730, in rejecting a defence based on the ratification principle;

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

131.                   In his ex-tempore judgment in the West Mercia case Dillon LJ relied on the above passage from the Kinsela case as, on its own, a full and sufficient justification for his conclusion that the director Mr Dodd had acted in breach of a creditor duty to his by then insolvent company. He said that the director Mr Dodd was:

“guilty of breach of duty when, for his own purposes, he caused the £4,000 to be transferred in disregard of the interests of the general creditors of this insolvent company” see [1988] BCLC 250, 253.

It mattered that there was a creditor duty, because the County Court judge had acquitted Mr Dodd of misfeasance for having brought about an undoubted fraudulent preference because the money was due and payable to the preferred creditor, so not mis-applied, even though it reduced a debt which Mr Dodd had guaranteed.

132.                   Although there have since been many cases which have followed both the Kinsela and West Mercia cases in recognising and enforcing the creditor duty, in none of them (or at least those to which this court was referred) was there any fundamental re-examination of its justification. But there was trenchant academic criticism: see in particular: Dawson F, Acting in the Best Interests of the Company - For whom are the Directors ‘Trustees’? (1984) NZULR 68; Sarah Worthington, Directors’ Duties, Creditors’ Rights and Shareholder Intervention (1991) 18 MULR 121; Justice Hayne AC, Directors’ Duties and a Company’s Creditors (2014) 38 MULR 795. The thrust of this criticism may be summarised as follows. First, it would be wrong to recognise a duty owed by directors directly to, and therefore enforceable by, creditors. This would be incompatible with a fiduciary duty (involving single-minded loyalty) to the company itself, as a separate entity distinct from even its shareholders and a fortiori from its creditors. Secondly, it is wrong to regard limited liability as a privilege (and therefore with strings attached, such as a duty of care to creditors). Rather it is the essential basis of the commercial enterprise and risk-taking which underpins the success of modern business in Western society. Thirdly, creditors (or at least voluntary creditors) deal at arms-length with limited companies and may fairly be expected to form their own judgment about whether to give credit to them and, if so, on what terms as to security. Fourthly, creditors (or at least unsecured creditors) never have a proprietary interest in the assets of a company, even when it is in insolvent liquidation, any more than do shareholders. Creditors merely have statutory rights to share in the net proceeds of the liquidation process, with the priority given to them by the statutory code.

133.                   To these criticisms Mr Rabinowitz added the submission that the true basis of the directors’ duty to act for the benefit of shareholders, expressly recognised in section 172(1) of the 2006 Act and in settled authority, was that the shareholders were, as its corporators, to be identified with the company, and that the fiduciary trust and confidence between them and the directors arose because of their power to choose, appoint and remove them. This was, he submitted, fortified by the rationale behind the ratification principle, and the cases suggesting that it was disapplied by insolvency were all wrongly decided, being based on no more solid foundations than the West Mercia case itself.

134.                   Finally Mr Rabinowitz submitted that the West Mercia case was decided without reference to the binding contrary authority of the Court of Appeal in In re Wincham Shipbuilding, Boiler and Salt Co (sometimes called Poole, Jackson and Whyte’s case) (1878) 9 Ch D 322. Three shareholder directors of an insolvent company, who were guarantors of the company’s overdraft, paid to the company money due on their shares, which was then credited at their direction to the company’s overdrawn bank account eliminating their guarantee liability, two days before the presentation of a creditors’ winding up petition. The payment was (in the view of the Court of Appeal) not a fraudulent preference, but the liquidator persuaded Bacon V-C at first instance that it amounted to a breach of trust by the directors, because it served their interests rather than the interests of the company. Allowing the appeal, Jessel MR said this:

“The Vice-Chancellor decided the question on this ground, that the directors were trustees of all their powers. So, no doubt, they were. … But it appears to me that the question is, for whom were they trustees? ... It has always been held that the directors are trustees for the shareholders, that is, for the company. … But directors are not trustees for the creditors of the company. The creditors have certain rights against a company and its members, but they have no greater rights against the directors than against any other members of the company. They have only those statutory rights against the members which are given them in the winding-up.”

It will be necessary to return to this dictum in due course, but what stands out for present purposes is the way in which Jessel MR equated the company with its shareholders for the purpose of his analysis of the directors’ duties in the phrase: “the directors are trustees for the shareholders, that is, for the company”.

135.                   No-one now contends that directors owe duties direct to shareholders (in the sense that shareholders can enforce them directly) or, for that matter, directly to creditors. It is common ground that their duties are owed to the company and to no-one else. But this passage is illuminating, from a historical perspective, in suggesting that it was the perception in the mind of judges like Jessel MR that for these purposes the company and its shareholders were one and the same that led to their view that, in the discharge of duties to the company, directors needed only to have regard to the interests of shareholders, so that they did not owe a duty to consider or act in accordance with the interests of creditors.

136.                   The cases from which the ratification principle has emerged do tend to support the respondents’ thesis that, for certain purposes, shareholders may be regarded as the equivalent of the company (“the corporators” as counsel put it). The earliest is the famous decision of the House of Lords in Salomon v Salomon & Co Ltd [1897] AC 22, in which, overruling the Court of Appeal, it was held that a purchase by the company of a solvent business from its founder at a gross overvalue could not be challenged by its liquidator, because it had been known of and approved, while the company was itself solvent, by all its shareholders: see per Lord Davey at p 57. Perhaps ironically that case is generally regarded as a leading authority for the principle that a company is a distinct entity, separate from its shareholders or any one of them, even if it is a “one man” company: see e.g. per Lord Macnaghten at pp 51 and 53. This emphasis arose from the need for the House of Lords to disapprove the reasoning of the Court of Appeal that, in the circumstances of that case, the separate personality of the company should be ignored. The justification which has emerged for the ratification principle from the authorities is that the unanimous decision of a company’s shareholders about a matter within its corporate capacity makes the decision the company’s “own act” about which neither it nor its liquidator on its behalf can thereafter complain. If the relevant decision was originally made by the directors, then its subsequent ratification by the shareholders releases the directors from any liability for breach of duty.

137.                   This “own act” justification for the principle emerges most clearly from the judgment of Lawton LJ in Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258, 269:

“What the oil companies were doing was adopting the directors’ acts and as shareholders, in agreement with each other, making those acts the plaintiff’s acts.”

By way of explanation, the oil companies were the only shareholders in the company bringing claims against (inter alia) its directors. The impugned decisions were all made when the plaintiff company was solvent: see per Dillon LJ at p 288D-E and 290A.

138.                   This combination of academic criticism, earlier inconsistent authority and the undoubted parallel existence of the older ratification principle do amount to a formidable basis for undertaking a re-appraisal of the very existence of the creditor duty. Nonetheless, for the reasons which follow, I am persuaded that the undertaking of that re-appraisal shows that the existence of a creditor duty at common law is sufficiently established, and sufficiently well-founded on principle, for it to be appropriate for this court to affirm it.

139.                   I would start by accepting that the original, historical, justification for regarding the general duty of directors to their company as being to manage its affairs for the benefit of its shareholders arose from a perception that, as its corporators, shareholders could for that purpose be equated with the company itself. This emerges with striking clarity from the Wincham case. But the law has since moved on a long way from a view that the interests of others in relation to the company, and its relationships with others, are altogether irrelevant. Put shortly, of the two strands in the reasoning in the Salomon case, namely the company as a separate entity with its own interests and responsibilities and the company as an abstract equivalent of its shareholders, it is the first which has clearly prevailed over time.

140.                   Section 172(1) of the 2006 Act makes this clear in terms. It provides:

“(1)     A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to -

(a)       the likely consequences of any decision in the long term,

(b)      the interests of the company’s employees,

(c)       the need to foster the company’s business relationships with suppliers, customers and others,

(d)      the impact of the company’s operations on the community and the environment,

(e)       the desirability of the company maintaining a reputation for high standards of business conduct, and

(f)       the need to act fairly as between members of the company.”

This provision recognises that, as a separate entity from its shareholders, a company has responsibilities of a legal, societal, environmental and, in a loose sense, moral or ethical nature, compliance with which is likely to secure rather than undermine its success. These responsibilities are not those of its shareholders, even viewed as a whole. But compliance with them is a matter for the directors, as custodians of what Lord Templeman memorably called the “conscience of the company” in the Winkworth case [1986] 1 WLR 1512, 1516.

141.                   Creditors are not mentioned in section 172(1), but the list of matters to which the directors are to have regard is not exclusive, and both employees and suppliers are likely to form important classes of a company’s creditors as it approaches insolvency. Furthermore the absence of an express mention of creditors as a class in section 172(1) is readily explained by Parliament’s decision to leave consideration of their interests to the common law as reflected in section 172(3), having regard to the disagreement about the ambit and extent of the creditor duty among those providing expert assistance to the company law reform project of which the 2006 Act was the end product.

142.                   The passage of time has therefore given real force to this second justification for the creditor duty, provided that it can properly be said that consideration of the interests of creditors is a responsibility of the company which is, or is on the verge of being, insolvent. That responsibility is one fortified by the most ancient lineage, even though its particular incidents have long since been codified in statute: see para 129 above.

143.                   I would however firmly reject the submission of the respondents that the fiduciary duty to advance shareholders’ interests has anything to do with the fact that directors are, usually, selected, appointed and removed by shareholders, or that it arises from a sense of trust and confidence between them for that reason. The power to appoint and remove directors is not invariably conferred upon all the shareholders. It may be enjoyed only by a select class of them, and yet the statutory duty to manage the company for their benefit is clearly extended to all the shareholders, described as the “members as a whole” and section 172(1)(f) makes it clear that the directors may not confine their attention to benefitting only that sub-class of shareholders who happen to have the power to appoint and remove them.

144.                   More generally, trustees and other fiduciaries are very commonly appointed by persons other than the beneficiaries of the trust. And the widespread existence within the beneficiary class of persons (including persons unborn) who have no relationship at all with the trustees of traditional trusts makes the notion that the trustee’s fiduciary duty merely reflects a relationship of trust and confidence with their appointor impossible to accept.

145.                   I share the view of the academic critics that the first of the attempted justifications for a creditor duty, identified in Nicholson v Permakraft, is unpersuasive. The real rationale of limited liability is not to confer a privilege, but to encourage risk taking as an essential part of commercial enterprise. Nor is there any basis in my view for treating creditors as persons to whom the directors, through the company, may be said to owe a duty of care, or for converting into legal obligation a perception based on business ethics that creditors deserve protection from harm in any general sense.

146.                   The second justification is that directors may properly be required to observe a creditor duty because they do so as custodians of the conscience of the company. This is more persuasive than the first, although it has nothing do with limited liability. The responsibility of an insolvent company to its creditors is the same in principle as the responsibility of an individual: see para 129 above. Viewed as a separate entity from its shareholders, the company does not enjoy limited liability at all. It is the shareholders who have limited liability for the company’s debts. The company is liable for them in full, although the process of insolvent liquidation or administration will regulate how, and how far, that liability is to be discharged when the company’s assets are insufficient for that to be achieved in full. The bankruptcy process fulfils the same purpose for an individual, albeit in a different way.

147.                   It is however the third justification for the creditor duty which has thus far held sway in the United Kingdom. Although it is correct that neither unsecured creditors or shareholders have a proprietary interest in the assets of a company, whether or not solvent or even in liquidation, it is not an abuse of language to describe creditors as having the main economic stake in the liquidation process which may be triggered by insolvency, and therefore as persons whose interests must be taken into account (albeit not necessarily as paramount) by the company’s fiduciary managers, while still in control of the management of the insolvent company before the onset of liquidation. In that respect the key word in Street CJ’s expression of the justification in the Kinsela case 4 NSWLR 722, 730 is “prospectively” in the sentence:

“They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets.”

148.                   When it is borne in mind that, once liquidation is inevitable, the directors face personal liability under section 214 of the 1986 Act if they do not treat minimising loss to creditors as their paramount responsibility, the prospect that creditors may eventually attain the status of paramount stakeholders in a statutory liquidation process once the company is exposed to liquidation by insolvency seems to me to be a very sensible justification for the existence of a common law duty to the company at least to consider creditors’ interests at that (usually earlier) stage. I would accordingly reject the submission that the creditor duty lacks coherent or principled justification.

149.                   Nor do I regard the undoubted existence of the common law ratification principle as an obstacle to the recognition of a common law creditor duty, although I would accept that the two cannot sensibly co-exist at the same time in relation to the same company. It is now settled that the ratification principle does not apply to a decision by shareholders which is either (i) made at a time when the company is already insolvent or (ii) the implementation of which would render the company insolvent: see Bowthorpe Holdings Ltd v Hills [2003] 1 BCLC 226, at paras 51 to 54 per Sir Andrew Morritt V-C after a review of the authorities on the ratification principle. The respondents submit, correctly, that the Bowthorpe case and other authorities to the same effect such as Official Receiver v Stern (No 2) [2002] 1 BCLC 119, para 32 are themselves dependent upon both the Kinsela and West Mercia cases, but that misses the point, for two reasons. First they show how the ratification principle can (if necessary) readily adapt to the creditor duty on a principled basis. Secondly, and perhaps more importantly, close study of the leading cases on the ratification principle prior to the West Mercia case, from the Salomon case onwards, shows how careful the courts have been to apply the principle only to a solvent company. Thus in the Salomon case the evidence established that the business being acquired by the newly formed company was perfectly solvent: see [1897] AC 22, 25. In In re Horsley & Weight Ltd [1982] Ch 442 the ratification principle was applied to the decision of shareholders in a solvent company. At p 455, Templeman LJ said:

“If the company had been doubtfully solvent at the date of the grant to the knowledge of the directors, the grant would have been both a misfeasance and a fraud on the creditors for which the directors would remain liable.”

In the West Mercia case [1988] BCLC 250, 252, Dillon LJ distinguished the Multinational Gas case (in which the ratification principle had been applied) on the basis that the company in question had been “amply solvent”. A conclusion that the ratification principle is not irreconcilable with the creditor duty is provided, albeit for slightly different reasons, in both the Permakraft and Kinsela cases.

150.                   Finally I would acknowledge that the Wincham case was Court of Appeal authority which, on its facts, is hard to reconcile with a creditor duty. It may not have been cited to, or is at least not expressly dealt with, in the West Mercia case or in any of the later cases which have followed it. Strictly, the case was about the validity of the shareholder directors’ early payment to the company of amounts due on their shares, rather than the company’s payment of that money into its overdrawn bank account. But the company was insolvent, and probably headed inevitably for liquidation, since it had ceased to trade some four weeks before the payments were made. It is hard to see how the directors could have defended a claim under what is now section 214, had it been in force at the time.

151.                   This court is of course free to choose between the Wincham and West Mercia cases. If forced to do so I would unhesitatingly prefer the latter. But the difference in approach to the recognition or otherwise of a creditor duty is better explained by the passage of time, and the development of thinking about both the separate personality of the company from its shareholders, and the company’s separate responsibilities from those of its shareholders, as reflected in section 172(1), and described above. There can be no doubt that the existence rather than the denial of a creditor duty is more consistent with both company law, as reflected in the 2006 Act and with insolvency law as largely codified in the Insolvency Act 1986. It is also consistent with the development of the modern corporate rescue culture, in which securing the co-operation of the company’s creditors (rather than ignoring them) can make all the difference between success and failure.

152.                   I have thus far been concerned to address the detailed and impressive submissions of the respondents as to why there is no creditor duty, rather than positive reasons why it should be affirmed. There are in my view two which are compelling, once it is recognised that there is no strong reason of principle to the contrary. The first is that there is now a long line of authority, both in the English courts and in Australia and New Zealand, beginning in the mid-1980s, which affirms the existence of the duty as settled law, albeit with uncertainties at the margins as to its precise content, scope and engagement. This is far from an area of conflicting authority. It is unnecessary to describe or even list the cases, that task having been accomplished by David Richards LJ in the Court of Appeal. But they include two cases in which, after the coming into force of the 2006 Act, the existence of the creditor duty was affirmed, albeit obiter, in this court: namely in Stone & Rolls Ltd v Moore Stephens [2009] AC 1391, para 236 per Lord Mance and in Bilta (UK) Ltd v Nazir (No 2) [2016] AC 1, para 104 per Lord Sumption and para 167 per Lord Toulson and Lord Hodge. It was also mentioned, in passing, by the Judicial Committee of the Privy Council in Byers v Chen [2021] UKPC 4, para 91.

153.                   Secondly, and conclusively in my view, the existence (although not the precise content and engagement) of the creditor duty was affirmed as existing at common law in section 172(3). That subsection needs to be interpreted in its historical context. It refers to “any enactment or rule of law” and makes the general duty set out in the rest of section 172 subject to it. It does not say “enactment or rule of law if any”. Generally the formulation used would be construed as a reference to any rule of law in force at the time of the passing of the 2006 Act. Parliament must be taken to have understood the general state of the common law at that time, which by the binding Court of Appeal authority of the West Mercia case did clearly recognise a creditor duty, even if the precise content of that rule of law may have had fuzzy edges, and might thereafter be subject to further judicial development.

154.                    Lady Arden suggests that this analysis of section 172(3) is made without benefit of the Explanatory Notes and without considering their history, or the history of the White Papers. In my respectful view section 172(3) speaks for itself in sufficiently clear terms, and I note that Lord Reed is of the same opinion. But I agree with Lord Hodge, for the reasons he gives, that those additional materials confirm the interpretation of section 172(3) which I have derived from reading its language in context.

155.                    It must be acknowledged that whereas section 172(3) makes the section 172(1) duty subject to any creditor duty, the other duties referred to in sections 171 to 177 are not expressed to be so subjected. This was not a point addressed in the parties’ submissions. In my view this point does not militate against the continuing recognition of a creditor duty, for the following reasons. First, it is only the duty in section 172(1) to promote the success of the company for the benefit of its members that is likely to come into serious conflict with a creditor duty, so that one needs to be regarded as subject to the other, in circumstances where both cannot be performed together.

156.                   Secondly, and by contrast, performance of the other duties, in sections 171 and 173 to 177 give rise to no such likelihood of conflict. They are the duty to act within powers, to exercise independent judgment, to exercise reasonable care, to avoid conflicts of interest, not to accept third party benefits and to declare interests in proposed transactions. They may all co-exist with the performance of a creditor duty. Lord Hodge explains this point in more detail in his judgment, and I agree with it.

157.                   For those reasons I would resolve the first issue against the respondents.

Issue 2: Can the creditor duty apply to a decision by directors to pay a lawful dividend?

158.                   United Kingdom company law regulates the payment of dividends by a combination of very old common law rules and a modern statutory code. The common law rules are those which (apart from statutory authority) restrain a company from reducing its capital: see Trevor v Whitworth (1887) 12 App Cas 409. The modern statutory code is to be found in Part 23 of the 2006 Act. It provides that dividends may only be paid out of distributable profits, and then prescribes detailed rules for ascertaining what those are, at any given time, usually by reference to the company’s last annual accounts. Those rules incorporate accounting standards which (in FRS 12) require provision to be made for probable future liabilities, but not for liabilities which, although there is a real risk that they may occur, are regarded as unlikely.

159.                   The main thrust of the respondents’ case on this issue (which is that the creditor duty can never apply to payment of a lawful dividend) is that if the creditor duty is triggered by a real risk of insolvency, by reason of the existence of contingent future liabilities which are unlikely to occur, this would run counter to the basis upon which Part 23 requires future liabilities to be provided for, as summarised above. In short, Parliament has prescribed that creditor protection against a company paying away assets to shareholders is to be delimited by reference to probable liabilities, not those falling below that threshold. It is pointed out that a similar threshold is applied to protect future creditors from the return of assets to shareholders in a members’ voluntary liquidation: see section 89 of the Insolvency Act 1986, Stanhope Pension Trust Ltd v Registrar of Companies [1994] BCC 84, 89 per Hoffmann LJ and In re Danka Business Systems plc [2013] Ch 506, para 43 per Patten LJ.

160.                   Leaving aside the question whether the creditor duty is engaged when there is only a real risk of insolvency (which I address later) there are two reasons why the respondents’ case on this issue must fail. The first is that, subject to two irrelevant exceptions, the whole of Part 23, and the authority which it provides to pay dividends, is subject to any rule of law to the contrary: see section 851(1). If as I have concluded the creditor duty is part of the common law, then it cannot be treated as ousted by Part 23. In that context the respondents expressly concede that the general duty of directors in section 172(1) is not excluded by Part 23. There is no sensible reason why the creditor duty recognised by section 172(3) should be either.

161.                   The second reason is that given by David Richards LJ in the Court of Appeal for concluding that this argument is “unsustainable”, at para 224. Part 23 identifies profits available for distribution on a balance sheet basis. A company may well have a balance sheet surplus while being commercially (ie cash flow) insolvent. It cannot be the case that directors of a company already unable to pay its debts as they fall due could distribute a dividend, or do so if the consequence of the payment was to bring about cash flow insolvency. To do so in those circumstances would be to take a foolhardy risk as to the long-term success of the company, by exposing it to the real risk (or at least a gravely increased risk) of being wound up.

162.                   No different conclusion is to be derived from the fact that a proposed dividend would not offend the common law rules against reduction of capital, and the contrary was not seriously suggested. There is old authority that creditors have no cause of action to restrain a lawful payment by way of distribution: see Lee v Neuchatel Asphalte Co (1889) 41 Ch D 1 and Lawrence v West Somerset Mineral Railway Co [1918] 2 Ch 250. But those were not cases about a creditor duty owed by directors to the company, and it is no part of the appellant’s case that the creditor duty is owed directly to, or enforceable by, creditors.

Issue 3: What is the content of the creditor duty?

163.                   The impressive unity of the authorities about the existence of the creditor duty is not matched by any similar unanimity about its precise content. It is clear from section 172(3) that it is not merely a duty to take account of the interests of creditors to the extent only that this may assist in securing the success of the company for the benefit of its members, as is required by section 172(1) in relation to the interests of employees, or the company’s relationships with its suppliers and customers. That type of duty is no more than an aspect of the directors’ general duty to manage the company for the benefit of its shareholders. It cannot conflict with it and does not require the directors to advance the interests of (eg) employees if this would conflict with acting for the long-term benefit of the members as a whole.

164.                   Nor is it a duty, once engaged, always to treat creditors’ interests as paramount. Section 172(3) speaks in the alternative of a duty to consider creditors’ interests or a duty to act in accordance with them. Creditors are not to be treated as having the main economic stake in the company at least while a company is solvent or, if insolvent, while there is still light at the end of the tunnel. It is not enough to say that, once there is a risk of insolvency, the implicit risk that they as a class will get hurt in their pockets is a sufficient reason for elevating them to the status of paramount stakeholders, still less as a class whose interests must always predominate. It is inherent in the law’s encouragement of risk-taking and commercial enterprise under limited liability that creditors of limited companies will get hurt from time to time. Most creditors are voluntary. They are therefore able to make their own judgment about those risks and to take such precautions against them by a demand for security as they think fit, armed with such public information about the financial position of the company as the law makes available, or the company chooses to provide.

165.                   It is only the onset of liquidation itself, rather than insolvency, that converts the creditors into the main economic stakeholders in the company. That is why section 214 only imposes liability upon directors for failure to act in their interests once liquidation becomes inevitable. That does make the creditors’ interests paramount, but insolvency itself may not.

166.                   There is however a line of thought in some of the authorities and text-books that the substitution of a paramount creditor duty for a general duty to serve the interests of shareholders is the almost automatic consequence of the exhaustion of any surplus in the company’s net assets (ie balance sheet insolvency). Once that surplus has gone, it is said, and the company is trading solely at the risk and benefit of the creditors, in the sense that it is their funds which are alone at stake, a paramount duty to serve the creditors’ interests necessarily follows, entirely replacing the former duty enshrined in section 172(1) to manage the company for the benefit of shareholders.

167.                   The clearest academic statement of that approach is to be found in Goode on Principles of Corporate Insolvency Law, 5th ed (2018), para 14-21:

“The true principle is not that the directors owe duties to creditors as well as to the company but that when the company is insolvent or ‘bordering on’ insolvency the directors, in discharging the general duties that they already owe to the company, must have regard predominantly to the interests of creditors, who now have the primary interest in the proper application of the company’s assets and whose interest is mediated through the company.”

The authorities which advance that thinking begin with Brady v Brady [1988] BCLC 20. It was alleged that the giving of financial assistance in the purchase of a company’s shares was in the company’s interests within the meaning of section 153 of the Companies Act 1985. At p 40 Nourse LJ said:

“The interests of a company, an artificial person, cannot be distinguished from the interests of the persons who are interested in it. Who are those persons? Where a company is both going and solvent, first and foremost come the shareholders, present and no doubt future as well. How material are the interests of creditors in such a case? Admittedly existing creditors are interested in the assets of the company as the only source for the satisfaction of their debts. But in a case where the assets are enormous and the debts minimal it is reasonable to suppose that the interests of the creditors ought not to count for very much. Conversely, where the company is insolvent, or even doubtfully solvent, the interests of the company are in reality the interests of existing creditors alone.”

168.                   In Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2002] EWHC 2748; [2003] 2 BCLC 153, para 74, Mr Leslie Kosmin QC (sitting as a deputy judge of the High Court) treated this dictum (together with the West Mercia and Kinsela cases) as authority for this proposition:

“Where a company is insolvent or of doubtful solvency or on the verge of insolvency and it is the creditors’ money which is at risk the directors, when carrying out their duty to the company, must consider the interests of the creditors as paramount and take those into account when exercising their discretion.”

Mr Kosmin’s dictum was followed by Norris J in Roberts v Frohlich [2011] EWHC 257 (Ch); [2011] 2 BCLC 625, para 85 and by John Randall QC (sitting as a deputy judge of the High Court) in In re HLC Environmental Projects Ltd [2013] EWHC 2876; [2014] BCC 337. It was referred to with approval by Newey J in Vivendi SA v Richards [2013] BCC 771, para 149, but only on the question whether the creditor duty could become engaged prior to actual insolvency. David Richards LJ cautiously espoused the same view, but expressly obiter, in the Court of Appeal in the present case, at para 222.

169.                   There are however dicta to the opposite effect: namely that, even when insolvency occurs, the creditors’ interests may not necessarily be paramount. In most of the authorities the duty is expressed as requiring creditors’ interests to be considered, or taken into account, with no mention of them being overriding. But the point is addressed more specifically in Westpac Banking Corpn v Bell Group Ltd (in liquidation) (No 3) [2012] WASCA 157; (2012) 270 FLR 1. At para 2046, Drummond AJA said:

“Owen J was correct, in my opinion, when he said at paras 4438 and 4439 that when a company is in an insolvency context the interests of creditors are not in all circumstances paramount, to the exclusion of other interests including that of the shareholders. His conclusion at para 4440 was that directors could not properly commit their company to a transaction if the circumstances were such that ‘the only reasonable conclusion to draw, once the interests of creditors have been taken into account, is that a contemplated transaction will be so prejudicial to creditors that it could not be in the interests of the company as a whole’. I would prefer to say that if the circumstances of the particular case are such that there is a real risk that the creditors of a company in an insolvency context would suffer significant prejudice if the directors undertook a certain course of action, that is sufficient to show that the contemplated course of action is not in the interests of the company.”

170.                   The question was considered in detail by Lt Bailiff Hazel Marshall QC sitting in Guernsey in Carlyle Capital Corpn Ltd v Conway, Royal Court of Guernsey, Civil Action 1519 (Judgment 38/2017) (unreported) 4 September 2017. After a review of the authorities, including the judgment of Rose J in the present case, she rejected Mr Kosmin’s formulation of the “paramount” duty as an overstatement of the true position, at para 452. She concluded at paras 455-456:

“In my judgment the principle, as it applies in Guernsey law is that once it is recognised that the company is ‘on the brink of insolvency’, the directors’ duty to act in the best interests of the company extends to embrace the interests of its creditors, and requires giving precedence to those interests where that is necessary, in the particular circumstances of the case, to give proper recognition to the fact that the creditors will have priority of interest in the assets of the company over its shareholders if a subsequent winding up takes place.

I formulate the principle in this way to take account of differences, according to particular circumstances, in what it may be reasonable and responsible for directors to do when they find that the company is in a sufficiently weak financial situation that a conflict of interest between its creditors and its shareholders appears to arise. The company is not - yet - in insolvent liquidation and remains under the management of the directors. Their duty is to decide what is in the extended best interests of the company in the particular case. It may well be that in some, possibly even most, situations, the company should thenceforth be run with regard to the best interests of its creditors alone, but that will not necessarily be true in all cases, and it is for that reason that I reject the word ‘paramount’.”

171.                   In my view the more nuanced analysis undertaken in the Westpac and Carlyle cases better reflects English law on this question than the more rigid expression of paramountcy of the interests of creditors on insolvency proposed in the Colin Gwyer case and those which have followed it. This is for three main reasons.

172.                   First, balance sheet insolvency will typically ante-date the section 214 trigger, namely inevitable liquidation. Thus to identify an earlier moment for the engagement of a common law duty to treat the creditors’ interests as paramount, based on insolvency rather than inevitable liquidation, would appear to run contrary to the statutory insolvency scheme, and indeed to make section 214 largely redundant. Why, if creditors’ interests become paramount on insolvency, should statute provide the liquidator with a discretionary remedy against the directors when, on the same facts, the directors would already have become liable to the company for breach of the creditor duty, from an earlier date, before section 214 became engaged?

173.                   Secondly, practical common-sense points strongly against a duty to treat creditors’ interests as paramount at the onset of what may be only temporary insolvency, still less at some earlier moment, such as when insolvency is imminent. Why should the directors of a start-up company which is paying its debts as they fall due but is balance sheet insolvent by a small margin abandon the pursuit of the success of the company for the benefit of its shareholders? And why should the directors, faced with what they believe to be a temporary cash-flow shortage as the result of an unexpected event, like the present pandemic, give up the pursuit of the long-term success of a fundamentally viable, balance sheet solvent, business for the continuing benefit of shareholders?

174.                   If the fact of insolvency always and immediately rendered the interests of creditors paramount, then directors would be likely to decide, or to be advised for their own protection, to cause the company immediately to cease trading, because that course would usually minimise the risk of further loss to creditors, whereas continued trading with a view to a return to solvency might increase that risk. It would in my view be wrong for the common law to impose that fetter on the directors’ business judgment. Section 214 is framed in terms which point to a very different parliamentary intention, because it permits directors to cause a company to continue to trade whilst insolvent, for as long as they reasonably discern light at the end of the tunnel.

175.                   Thirdly, insolvency of either the balance sheet or commercial kind does not of itself advance the status of creditors beyond being contingent main stakeholders. The contingency remains liquidation (when the statutory priority of creditors cuts in) rather than insolvency (when it does not). For as long as there remains light at the end of the tunnel, that contingency may never occur. It follows that the justification for the recognition of the creditor duty which has thus far prevailed in the United Kingdom does not go so far as to render creditors’ interests necessarily paramount upon insolvency.

176.                   In my view, prior to the time when liquidation becomes inevitable and section 214 becomes engaged, the creditor duty is a duty to consider creditors’ interests, to give them appropriate weight, and to balance them against shareholders’ interests where they may conflict. Circumstances may require the directors to treat shareholders’ interests as subordinate to those of the creditors. This is implicit both in the recognition in section 172(3) that the general duty in section 172(1) is “subject to” the creditor duty, and in the recognition that, in some circumstances, the directors must “act in the interests of creditors”. This is likely to be a fact sensitive question. Much will depend upon the brightness or otherwise of the light at the end of the tunnel; i.e. upon what the directors reasonably regard as the degree of likelihood that a proposed course of action will lead the company away from threatened insolvency, or back out of actual insolvency. It may well depend upon a realistic appreciation of who, as between creditors and shareholders, then have the most skin in the game: i.e. who risks the greatest damage if the proposed course of action does not succeed.

177.                   There is nothing inconsistent with the fiduciary nature of the directors’ duty that it calls for a balancing of potentially competing interests. Much of the development of fiduciary duty arose in connection with family settlements, where trustees charged with investment powers faced the constant challenge of balancing the interests of life tenants and remaindermen, the former being interested in maximising income, and the latter in preserving and enhancing capital. Similar questions attended the exercise of dispositive powers, such as maintenance and advancement.

Issue 4: When is the creditor duty engaged?

178.                   This is the issue upon which the appellant’s case has thus far foundered. It is necessary on the facts found for the appellant to show that the creditor duty is engaged (or triggered) whenever there is a real risk that the company may in the future become insolvent, not at the (usually) later date when insolvency is probable (as the Court of Appeal held) or only when there is actual or imminent insolvency. This is because, at the time of the May dividend, AWA was not actually or imminently insolvent, nor was insolvency even probable. But there was a real risk of insolvency in the medium to long term future, because of the large uncertainties affecting the value of its contingent liabilities and of an important class of its unrealised assets.

179.                   As the thorough review of the relevant English and Commonwealth authorities by David Richards LJ demonstrates, there is not to be found in them any clear guidance as to a precise answer to the “when” question. Dicta can be found to support any of the competing alternatives, from real risk of insolvency as the earliest to actual insolvency as the latest, with various intermediate triggers such as probable or imminent insolvency, on the brink of insolvency, threatened with insolvency or of doubtful solvency, or even a “parlous financial condition”, all lying somewhere in between. But in most of the cases where the duty was held to have arisen the subject company was actually insolvent, so that the expression of the trigger as arising potentially at an earlier date was no more than an obiter dictum. For the same reason there is before the decision of the Court of Appeal in the present case no in-depth analysis of the “when” question as a matter of principle, beyond the competing principled justifications for the existence of the creditor duty which I have already described.

180.                   I do not consider that it would serve any useful purpose to trawl again in writing through the authorities in a vain search for a hidden gem which eluded David Richards LJ and has eluded me. In fairness however to the appellant I will focus on the small number of authorities containing dicta said to be supportive of a “real risk” trigger. But I will mainly be concerned in what follows with the underlying principles, as indeed were the parties.

181.                   The authorities which may be said to support a “real risk” trigger may be divided into two classes, Australian and English. Mr Thompson acknowledged that the English cases contained no more than obiter dicta, but he submitted that the Australian cases based themselves on a real risk as part of their ratio, and that the Court of Appeal in the present case undervalued them. The first is Grove v Flavel (1986) 11 ACLR 161, a decision of the Supreme Court of South Australia on a case stated in a criminal appeal, in which the question was whether the defendant director had made improper use of company information, contrary to section 124(2) of the Companies Act 1962 (SA). The relevant information was that the company had been refused a loan which gave rise to a real risk of its insolvent liquidation. The company was not insolvent when the defendant used that information to arrange transactions for his benefit (and that of other companies of which he was a director) to the eventual prejudice of the company’s creditors when it later went into liquidation. After a review of the Walker v Wimborne, Permakraft and Kinsela cases, the court held that the use of such information was improper. Giving the leading judgment, Jacobs J said at p 170, that the principle which imposed a creditor duty on a director was the proposed use of assets of a company which would otherwise be available to creditors in a liquidation, when the company was known to be insolvent. It was (following the Permakraft case) “the creditors’ money that is at stake”. If so there was no reason why the same duty should not apply when insolvency was perceived to be a real risk.

182.                   I would acknowledge that the real risk of insolvency trigger for the engagement of the creditor duty was part of the ratio of the case. But I would be disinclined to treat it as persuasive. First, the analysis was heavily based on the justification for the creditor duty given in the Permakraft case, which I have found (for reasons already given) to be the least persuasive of the three which have been relied upon, and which forms no significant part of the justification for the creditor duty in the English cases. Secondly, there is little more than an assertion in Jacobs J’s reasoning that a duty triggered by actual insolvency should in principle be triggered also by a real risk of insolvency. Thirdly, the same conclusion could equally have been drawn, on the facts of that case, from the fact that the director used the relevant information to enable him to carry out a transaction deliberately designed to prejudice the interests of creditors which, if it had happened in the United Kingdom, would have been contrary to section 423. It is, in passing, an irony of the present case that the May dividend has been found to have offended section 423 but no claim that it involved for that reason alone a breach of duty by the respondent directors has ever been pursued.

183.                   Grove v Flavel was followed by the Court of Appeal of New South Wales in Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 25 ACLC 1094. The relevant question was whether, to the knowledge of the recipient, a payment had been made from an already insolvent company by its director in breach of duty. As noted by David Richards LJ, at para 186, the paying company was found to have been insolvent at the time of the payment, or was rendered insolvent thereby. But it was held to have been sufficient for the payee to have known (as he did) that the payee company was at real risk of insolvency as the result of the payment. Giles JA said, at para 162:

“It is sufficient for present purposes that, in accord with the reason for regard to the interests of creditors, the company need not be insolvent at the time and the directors must consider their interests if there is a real and not remote risk that they will be prejudiced by the dealing in question.”

184.                   The Kalls case adds little by way of principled analysis to Grove v Flavel. The reasoning appears to be that risk of insolvency means risk to creditors with a consequential duty to protect creditors from that risk. I will address that reasoning (which forms the appellant’s main principled submission) in due course.

185.                   The Westpac case is the last in the Australian trilogy. The relevant companies were, again, actually insolvent at the time of the alleged breaches of duty by the directors, so that the question whether the creditor duty might be triggered short of insolvency did not arise. But both the judge (Owen J) and the Court of Appeal of Western Australia considered the question on an obiter basis. Without committing himself to any precise description of when, prior to actual insolvency, the duty would be triggered, Owen J offered this principle, at [2008] WASC 239, para 4445:

“The basic principle is that a decision that has adverse consequences for creditors might also be adverse to the interests of the company. Adversity might strike short of actual insolvency and might propel the company towards an insolvency administration. And that is where the interests of creditors come to the fore.”

I would agree with Owen J’s focus on insolvency administration, rather than just insolvency, as the moment when creditors’ interests come to the fore. But that statement of principle does nothing to advance the appellant’s case that the creditor duty is engaged by a real risk of insolvency.

186.                   Nor do the dicta on the point given by Drummond AJA in the Court of Appeal. He acknowledged that the creditor duty was still in a process of development, and was reluctant to commit to any more precise identification of the trigger than that the company should be “insolvent or near insolvent”. His only reference to “real risk” was in para 2046 (already cited above). This was not about real risk of insolvency but rather a real risk that a proposed transaction would prejudice creditors. I agree with David Richards LJ at para 191 that the Westpac case provides no assistance to the appellant.

187.                   The two English cases relied upon by the appellant in relation to this question are the Vivendi and HLC cases already cited. In Vivendi the subject company was already insolvent: see per Newey J at para 152. At para 150 he cited both the passages from the Kalls and Westpac cases which I have set out above, but under the comment that they were to similar effect as Mr Kosmin’s dictum in the Colin Gwyer case about the creditor duty being engaged when a company is “insolvent or of doubtful solvency or on the verge of insolvency”. In my view Newey J was plainly not thinking in any precise terms about exactly when, prior to actual insolvency, the creditor duty might be triggered, still less saying that a real risk of insolvency would be sufficient. All he was saying was that there appeared to be developing a consensus in both England and Australia (as there indeed was) that the duty could be engaged at some unspecified time prior to actual insolvency. That was more than sufficient for his purposes.

188.                   The HLC case takes the matter no further, for the reasons given by David Richards LJ at para 175. In short Mr Randall QC treated all the various pre-insolvency triggers as in principle the same. He had no need to do otherwise, because the subject company was, again, actually insolvent at the time of the impugned transactions, both on a balance sheet and cash flow basis. The facts of the present case demonstrate however that there can be a very large difference between a real risk of insolvency on the one hand and probable or imminent insolvency on the other as triggers for the engagement of the creditor duty, and that they may occur in relation to the same company at widely differing times. In particular a company may face a real risk of insolvency at a time when it is not in a parlous or distressed financial position at all. I agree with David Richards LJ that the two cannot simply be assimilated.

189.                   Mr Thompson’s main submission of principle for the adoption of the real risk trigger for the engagement of the creditor duty was that it tracked, better than any other trigger, the development of a real risk of prejudice to creditors arising from the changing fortunes of the subject company. As already noted, this is echoed in the dictum of Giles JA in the Kalls case, quoted above. I acknowledge that it has an attractive logical simplicity. Furthermore the fact that, as I have already concluded, the creditor duty is to consider the interests of creditors rather than to treat those interests as paramount from the outset, means that the primary duty to promote the success of the company for the benefit of its members is not (or not necessarily) displaced at a stage when, prior to actual insolvency, they still have skin in the game.

190.                   Mr Thompson buttressed his main submission with the argument that if the interests of creditors became paramount once the company was actually insolvent, then little room was left for a (logically prior in time) duty merely to consider and balance their interests, unless the creditor duty in that less stringent form was triggered at some much earlier time. This would have been a powerful argument if I had not disagreed with its premise. For reasons already explained I do not consider that the interests of creditors necessarily become paramount at the point of actual insolvency. Nonetheless the absence of that buttress does not mean that the main submission loses any of its inherent logical force.

191.                   I would however reject real risk of insolvency as the appropriate trigger for the engagement of the creditor duty. My main reason for doing so is that it rests upon an unsound principle. It assumes that creditors of a limited company are always among its stakeholders, so that once the security of their stake in the company (ie their expectation of being repaid in full) is seen to be at real risk, there arises a duty of the directors to protect them. That may be said to be the assumption which underlies what I have labelled the Permakraft justification for the existence of the duty, and indeed those cases which have appeared to favour the real risk trigger.

192.                   The true principle by contrast is that creditors (or at least unsecured creditors) are not the main stakeholders in the company at any earlier date than when it goes into insolvent liquidation, at which point they acquire statutory priority in an entitlement to share pari passu in any distributions which that process may generate. It is that prospective entitlement which entitles them to have their interests considered, although not necessarily given paramountcy, when the onset of insolvency makes that prospect both much more likely and one which may be beyond the ability of the company to control, in the sense that insolvency immediately exposes a company to being wound up at the behest of any unpaid creditor.

193.                   Put in the language of real risk, it is insolvency itself which creates the very real risk that the prospective entitlement of creditors to share in distributions in a liquidation will come to pass. But a real risk of insolvency is at one very large remove. It is simply too remote from the event which turns a creditor’s prospective entitlement into an actual one. When real risk is distinguished from probability (as it must be for present purposes) insolvency itself is by definition unlikely, and insolvent liquidation may only be a remote possibility.

194.                   I consider that a trigger of that degree of remoteness is insufficient in principle to displace the ordinary general duty of directors to promote the success of their company for the benefit of its shareholders. The present Covid-19 pandemic provides a practical template upon which the excessive remoteness of this trigger may be demonstrated. In March 2020 it must have appeared to the directors of innumerable companies in the travel and hospitality businesses that they faced a real risk of insolvency. During the two years which followed, some have no doubt become permanently insolvent (with no light at the end of the tunnel). Others have become temporarily insolvent, but kept open a realistic prospect of recovery by sensible negotiations with creditors, and may either have returned to solvency, or be confidently on the way to doing so as restrictions are lifted. Others have even avoided insolvency altogether, whether by seeking state loans, furlough payments for their employees, cutting their overheads or trying alternative types of business, such as take-away meals. Only for the companies in the first (permanently insolvent) group will their creditors have become entitled (actually or inevitably) to share in the proceeds of their winding-up or administration.

195.                   Lest the pandemic be regarded as too much of a one-off event to be a reliable guide, I repeat that risk taking is a fundamentally important reason for the recognition of limited liability. There will always be companies formed for the purpose of undertaking a higher risk business than their owners would be prepared to contemplate if failure would leave them personally liable. Such businesses may face a real risk of insolvency for most of their trading existence, without ever becoming insolvent, still less going into insolvent liquidation.

196.                   A recollection that the trigger for the engagement of the creditor duty must sensibly coincide with the moment when the ratification principle ceases to apply also points away from a real risk trigger. No case about the limits of the ratification principle has gone that far, and I would regard the disapplication of it whenever there was a real risk of insolvency as too great an inroad into a principle that is nearly as old as company law itself.

197.                   Mr Thompson sought to pray in aid, by way of analogy, the trigger for the availability of an administration order, as interpreted by Hoffmann J in In re Harris Simons Construction Ltd [1989] 1 WLR 368. Section 8(1) of the Insolvency Act 1986 gave the court power to make an administration order if (a) it is satisfied that the company is or is likely to become unable to pay its debts and (b) it considers that such an order “would be likely to achieve” one of the purposes of administration stated in section 8(3). Hoffmann J held that “likely” in (b) was satisfied if there was a real prospect short of a probability. Mr Thompson submitted that, by the same token, a company was exposed to administration (which might well lead to a distribution to creditors) if there was a real prospect of insolvency. In that case the company was already unable to pay its debts (ie commercially insolvent) when the order was made, and the real issue was whether one of the stated purposes of administration was likely to be achievable.

198.                   I do not consider that this analogy helps the appellant, or points in any way to a real risk trigger for the engagement of the creditor duty. Hoffmann J was careful to distinguish between likelihood of insolvency and likelihood that a purpose of administration could be achieved. As he said, the concept of likelihood took its precise meaning from its context. Furthermore only one of the purposes of administration involves the distribution of the proceeds of the company’s assets to creditors as in a liquidation (called a distributing administration). While I would not wish in any way to cast doubt on the judgment it was not the product of adversarial argument.

199.                   For the above reasons I would conclude that a real risk of insolvency is not a sufficient trigger for the engagement of the creditor duty, so that this appeal should be dismissed. It is not necessary for this court therefore to decide whether any other trigger earlier than insolvency itself would be sufficient, any more than it was for the Court of Appeal. The candidates proposed in argument are probable insolvency and imminent insolvency. Both find support from dicta in the authorities. In my view any trigger earlier than actual insolvency needs clear justification.

200.                   In the Court of Appeal David Richards LJ considered that there was sufficient justification for a pre-insolvency trigger, which he identified as when the directors know or should know that insolvency was probable (ie more likely than not), for the following reasons. First, directors might typically only become aware of actual insolvency some time after it had occurred. Secondly, there was a preponderance of dicta that some pre-insolvency trigger was merited. Thirdly, the alternative of “imminent” insolvency implied a very short period in terms of time, whereas a probability of insolvency might affect a company for a considerable time, during which creditors might well be prejudiced by decisions taken without consideration of their interests.

201.                   I can see the force about the first and second of those reasons, although directors who keep themselves properly informed about their company’s affairs ought to be aware of commercial insolvency (an inability to pay debts when they fall due) broadly when it occurs, even if balance sheet insolvency may be more insidious. The proper treatment of the company’s creditors is always likely to be a matter of concern (whether or not of duty) to directors, if only because the long-term success of a company is unlikely to be secured if it develops a poor record of late payment.

202.                   I am more cautious about David Richards LJ’s third reason. Prejudice to creditors is not, in and of itself, a reason for the recognition of a creditor duty, for the reasons already explained. And the bare probability of insolvency, which may only be temporary, does not of itself make a liquidation probable. It is liquidation rather than insolvency which converts creditors into the main stakeholders in the company.

203.                   I would prefer a formulation in which either imminent insolvency (ie an insolvency which directors know or ought to know is just round the corner and going to happen) or the probability of an insolvent liquidation (or administration) about which the directors know or ought to know, are sufficient triggers for the engagement of the creditor duty. It will not be in every or even most cases when directors know or ought to know of a probability of an insolvent liquidation, earlier than when the company is already insolvent. But that additional probability-based trigger may be needed in cases where the probabilities about what lies at the end of the tunnel are there for directors to see even before the tunnel of insolvency is entered.

204.                   I have read in draft the judgments of Lord Hodge and Lady Arden. I agree with Lord Hodge’s reasoning. On the points about which he and Lady Arden disagree I respectfully prefer his view. I hope that the reasons for my disagreement with Lady Arden’s analysis on those points are sufficiently apparent from what I have already stated. I mean no disrespect by not engaging with them in more detail.

205.                    I have also read in draft the comprehensive judgment of Lord Reed upon these matters. He reaches substantially the same conclusions about the existence of the duty, its content and the time when it is triggered as do Lord Hodge and I. There is also a very large overlap in our reasoning. I hope it is clear that, although I have used ‘creditor duty’ as a convenient label, it is as Lord Reed explains in truth an aspect (where it arises) of the director’s fiduciary duty to the company, rather than a free-standing duty of its own. Beyond that I do not consider that such differences in our respective reasoning as remain are sufficient to detract from the substantive concurrence of our conclusions upon the issues which arise, or therefore call for further detailed analysis on my part.

206.                   For those reasons I would dismiss this appeal.

LORD HODGE:

207.                   I agree, for the reasons given by Lord Briggs and subject to my comments below, that this appeal should be dismissed. I am satisfied that the directors of a company which is insolvent or is bordering on insolvency owe a duty to the company to have proper regard to the interests of its creditors and prospective creditors. In Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23; [2016] AC 1, para 123 Lord Toulson and I stated:

“It is well established that the fiduciary duties of a director of a company which is insolvent or bordering on insolvency differ from the duties of a [director of a] company which is able to meet its liabilities, because in the case of the former the director’s duty towards the company requires him to have proper regard for the interest of its creditors and prospective creditors.”

When a company is insolvent or bordering on insolvency its creditors are recognised as having a form of stakeholding in the company, and its directors from that point must have a proper regard to the interests of the company’s creditors as a body: ibid para 167. I repeated that view in an obiter passage in MacDonald v Carnbroe Estates Ltd [2019] UKSC 57; 2020 SC (UKSC) 23; [2020] 1 BCLC 419, para 33, in a judgment with which the other members of the court agreed. Having considered the written and oral submissions of counsel and having debated the matter with my colleagues on this court, I am satisfied that that remains good law. While the law in this area has remained in a relatively undeveloped and ill-defined state, I was not aware, until this appeal, of any serious challenge by company law practitioners to the existence of this fiduciary duty, which has been upheld by experienced commercial judges in a number of first instance decisions.

208.                    In view of the importance in company law of the existence of a fiduciary duty of directors to their company in relation to the interests of its creditors, I add a few comments of my own, on two questions. The first is whether section 172(3) of the Companies Act 2006 (“the 2006 Act”) gave at least tentative recognition to the existence such a duty in the common law. Because it is within the power of this court to alter the common law. The second question is whether there are sound reasons for maintaining such a duty as part of the common law in relation to companies. The latter question requires consideration of how far the courts should develop the common law duty in a field in which Parliament has already enacted a remedy in section 15 of the Insolvency Act 1985 which was shortly afterwards superseded by section 214 of the Insolvency Act 1986 (“the 1986 Act”).

209.                   In my view, in agreement with Lord Briggs, the words of section 172(3) of the 2006 Act point towards the purpose of preserving the common law as it had been developed before the 2006 Act, particularly in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250. That interpretation of the subsection is supported by a consideration of its historical origins, which I now address.

210.                   The Law Commissions produced a joint report, “Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties” (Law Com No 261; Scot Law Com No 173) in September 1999. I had the privilege of working with Lady Arden and then with Lord Carnwath on that report. It recommended a statutory statement of the main fiduciary duties of directors and their duty of care and skill. The statement was to be non-exhaustive; it was to be a partial codification because it was recognised that directors were subject to other duties which were not included in the proposed codification.

211.                   The question whether there should be a statutory statement of a duty of directors to consider foremost the interests of creditors when a company is insolvent or threatened with insolvency was taken up by the Company Law Review Steering Group (“CLRSG”), of which Lady Arden was a member. The CLRSG’s initial view, recorded in “Modern Company Law for a Competitive Economy; Developing the Framework”, published in March 2000, was not to include an obligation to have regard separately to the interests of creditors in such circumstances but to rely on insolvency legislation. The CLRSG consulted on that basis: “Developing the Framework”, paras 3.72-3.73.

212.                   The CLRSG recorded its views in response to the consultation to date in “Modern Company Law for a Competitive Economy: Completing the Structure” which was the third wide-ranging consultation document which the CLRSG published in November 2000. It recorded an intention that there should be a statement of the duties of directors at a high level of generality and stated (para 3.12):

“It is generally agreed that the duties must be subject to the overriding duties of directors towards creditors in an insolvency situation, but also that it is undesirable to lay down any detailed new rule in this area; the law is developing and there is already a carefully balanced statutory provision, which operates ex post in a liquidation, in the Insolvency Act 1986 section 214 (wrongful trading). We propose that this issue should be dealt with in a general provision in the statement making it clear that the duties operate subject to the other provisions of the Act and to the supervening obligations to have regard to the interests of creditors when the company is insolvent or threatened by insolvency. We propose that the details should be explored with the draftsman.”

213.                   In the CLRSG’s final report dated 26 July 2001 (“Modern Company Law: Final Report”) it is stated that, in providing a high-level statement of directors’ duties, it was important to draw to the attention of directors that different factors may need to be taken into consideration where a company is insolvent or threatened with insolvency (para 3.12). The report recorded that arguments had been advanced on consultation in favour of a statement of a duty towards creditors and there had been criticism that insufficient attention had been given to the responsibility of management not to abuse limited liability. The report proposed that the statutory statement should contain principles requiring directors to “have regard to the interests of creditors in relation to threatened insolvency” (para 3.13).

214.                   In para 3.14 the CLRSG recognised that there was a key question: when should the normal rule that a company is to be run in the interests of its shareholders be modified by an obligation to have regard to the interests of creditors or, in an extreme case, by an obligation to override the interests of members entirely? In para 3.15 the CLRSG stated that insolvency may occur unexpectedly and that limited liability exposed creditors to the risk of loss. The report then set out an argument in favour of the protection of creditors:

“[A]s insolvency becomes more imminent, the normal synergy between the interests of members, who seek the preservation and enhancement of the assets, and of creditors, whose interests are protected by that process, progressively disappears. As the margin of assets reduces, so the incentive on directors to avoid risky strategies which endanger the assets of members also reduces; the worse the situation gets, the less members have to lose and the more one-sided the case becomes for supporting risky, perhaps desperate, strategies.”

The law provided two solutions, namely (i) section 214 of the 1986 Act which the CLRSG suggested should be included in the statement of duties (para 3.16), and (ii) the arguable obligation on directors to take a balanced view of the risks to creditors at an earlier stage in the onset of insolvency, which was recognised in Australian case law and by the Court of Appeal in West Mercia Safetywear Ltd v Dodd.

215.                   Commenting on the latter rule the Final Report stated (para 3.18):

“Such a rule may be regarded as of considerable merit, at least in principle. It reflects what good directors should do. Without it, directors would apparently, at least, be bound to act in the ultimate interests of members until all reasonable prospect of avoiding shipwreck had been lost. Yet even where insolvency is less than inevitable but the risk is substantial, directors should, at least in theory, consider the interests of members and creditors together.”

216.                   As some members of the CLRSG were in favour of such a rule, the report provided in Annex C a draft clause 8 which if enacted would have imposed on a director who knew or ought to have known that “it is more likely than not that the company will at some point be unable to pay its debts as they fall due” a duty to:

“take such steps (excluding anything which would breach his duty under paragraph 1 or 5) as he believes will achieve a reasonable balance between -

(i)        Reducing the risk that the company will be unable to pay its debts as they fall due; and

(ii)       Promoting the success of the company for the benefit of its members as a whole.”

(Paragraph 1 concerned the duty of a director to exercise his powers for a proper purpose and paragraph 5 concerned his duty to avoid conflicts of interest.)

217.                   In para 3.19 the report recorded the counter arguments, which were that a requirement to reach a balanced judgment between members and creditors would have a chilling effect as it would create the risk that cautious directors, wishing to avoid personal liability, might run down or abandon a viable going concern when the company was threatened with insolvency. The balanced judgment demanded was said to be “a difficult and indeterminate one”. Directors of small companies might have to take expensive professional advice, which might err on the side of caution; and liquidation destroyed value where there were means of saving the business. The report in para 3.20 recognised the validity of those concerns.

218.                   The members of the CLRSG, who were working under strict time constraints, were not able to reach agreement on the inclusion in the statutory statement of an obligation to consider the interests of creditors. There was agreement that if there were to be such a statement, the law should be clarified by providing that the duty only arose when the directors ought in the exercise of due care and skill to recognise that a failure to meet the company’s liabilities was more probable than not. Some members considered the common law to be soundly based and that, with that clarification, the duty should be included in the statement. Others considered that the proposed statement gave inadequate guidance to directors, that the path to insolvency could be difficult to discern as insolvency could occur abruptly, and that the incorporation into the statement of duties of the rule in section 214 of the 1986 Act was sufficient in practice. The report concluded its discussion of the possible inclusion of a statement of principle that directors owed a duty in relation to a company’s creditors in the context of insolvency with a statement that the CLRSG had not reached an agreed position:

“The advantages and disadvantages of such a principle are very much a matter of commercial judgment, on which we have not been able to reach an agreed view nor, in the time available, to consult on the basis of a clear draft. We recommend that the [Department of Trade and Industry] should do so.”(Para 3.20)

The precise content of the directors’ statement of duties was in this respect left open, as Arden LJ (as she then was) herself stated: “Reforming the Companies Act - The Way Ahead” [2002] JBL 579, 592.

219.                   The UK Government consulted on its proposals in a paper “Modernising Company Law” (Cm 5553), which it published in July 2002. Later, in its White Paper, “Company Law Reform” (Cm 6456), which it published in March 2005, the Government included a precursor of section 172 of the 2006 Act, which included in section B3(1) a duty on a director to act in a way in which he or she considered, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole. Subsection (4) of this draft section was in these terms, foreshadowing precisely what was later enacted as section 172(3) of the 2006 Act:

“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.”

220.                   The Government provided explanatory notes to accompany the clauses published in its White Paper. The relevant entry (para B19) stated that clause B3(4) (above) recognised that the normal rule that a company is to be run for the benefit of its members as a whole may need to be modified where the company is insolvent or threatened with insolvency. It continued:

“In doing so, it preserves the current legal position that, when the company is insolvent or is nearing insolvency, the interests of the members should be supplemented, or even replaced, by those of the creditors.”

221.                   In Parliament the explanatory notes on the relevant section of the Company Law Reform Bill, which were prepared in March 2006, said this about what became section 172(3) of the 2006 Act:

“313.   Subsection (3) recognises that the duty to promote the success of the company is displaced when the company is insolvent. Section 214 of the Insolvency Act 1986 provides a mechanism under which the liquidator can require the directors to contribute towards the funds available to creditors in an insolvent winding up, where they ought to have recognised that the company had no reasonable prospect of avoiding insolvent liquidation and then failed to take all reasonable steps to minimise the loss to creditors.

314.   It has been suggested that the duty to promote the success of the company may also be modified by an obligation to have regard to the interests of creditors as the company nears insolvency. Subsection (3) will leave the law to develop in this area.” (All emphasis added)

The relevant paragraphs of the explanatory notes published by Parliament for the 2006 Act after it had received Royal Assent are in identical terms, as Lady Arden has demonstrated in para 443 of her judgment.

222.                   To my mind the relevant background shows that the Government in introducing the Bill considered that it was preserving the then current legal position and, more significantly, that Parliament itself explained both that section 172(3) was a recognition that the section 172(1) duty is displaced on insolvency (para 313) and that the subsection allowed the common law to be developed by modifying the section 172(1) duty when a company nears insolvency (para 314).

223.                   It is unfortunate that time did not permit the CLRSG to consult further and to resolve the differences among its members on the question of a duty in relation to a company’s creditors, particularly in the period as a company nears insolvency. In view of the undeveloped nature of the law set out in the West Mercia case and the disagreements among the members of the CLRSG as to the desirability as a matter of policy of such an obligation before the onset of irretrievable insolvency, the decision by Parliament to leave to the courts the development and refinement of such an obligation is readily understandable. But I cannot detect in the explanatory statements issued by Parliament any licence to the courts to assert the supremacy of the section 172(1) duty in relation to an insolvent company or any green light to deny the existence of an obligation at common law to have regard to the interests of creditors.

224.                   In my view, this background supports the interpretation of section 172(3) which Lord Briggs has adopted having regard to the natural meaning of the words which Parliament used (para 153 of his judgment). I therefore agree with Lord Briggs that Parliament endorsed the existence of an obligation to have regard to the interests of creditors in the context of the onset of insolvency of a company but left it to the courts to refine the law in this area.

225.                   Nor am I dissuaded from this view by the argument that section 172(3) refers only to the duty on a director in section 172(1) to act in a way which he considers in good faith would be most likely to promote the success of the company for the benefit of its members as a whole and does not expressly qualify the other statements of directors’ duties in the 2006 Act. In particular, it does not appear to me that the duty in section 171 that “a director of a company must … (b) only exercise powers for the purposes for which they are conferred” in any sense enshrines a principle of shareholder primacy so as to neutralise the effect of section 172(3). This is because section 170(4) provides:

“The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.”

This injunction to adopt common law techniques in interpreting and applying the duties suggests to me that section 171(b) should be read alongside and consistently with section 172 as a whole because it is the role of the courts to reconcile and make coherent the rules of the common law and equitable principles. Section 172(1) is the statutory statement of the duty of a director to promote the success of the company for the benefit of its members as a whole. It replaces the common law as section 170(3) provides that the statutory general duties “have effect in place of” the common law rules and principles on which they are based. In consequence it appears to me that the qualification of section 172(1) in section 172(3), where it applies, prevents any implication of the primacy of the interests of shareholders into the statement of the other general rules in the circumstances in which section 172(3) qualifies or disapplies section 172(1).

226.                   Expanding on this point, the duty of directors to exercise the powers conferred on them for the purposes for which they were conferred reflects the equitable doctrine that a trustee must use the powers conferred by a trust for the legitimate purposes of the trust. The duty requires directors to have regard to the real purpose and object of the powers conferred on them. They must use a power for the purpose for which it was granted: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, 834 per Lord Wilberforce, delivering the judgment of the Board; and Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71; [2015] Bus LR 1395, paras 14-16 per Lord Sumption. The duty is concerned with preventing the abuse of a power, as for example where directors misuse a power to influence the outcome of a general meeting of shareholders, thereby offending the constitutional distribution of powers between the different organs of a company. Another example of an abuse of a power is the well-known case of Hogg v Cramphorn Ltd [1967] Ch 254, in which Buckley J held that directors could not exercise their power to issue shares to defeat an unwelcome takeover, even if they genuinely believed that the continuance of their management was in the company’s interest. In most circumstances, section 172(3) would be irrelevant to the operation of this duty, and it is readily understandable why the 2006 Act did not state that it qualified the duty. Section 172(1) is a modern formulation of the well-established duty of directors to act bona fide in what they consider is in the interests of the company: In re Smith and Fawcett Ltd [1942] Ch 304, 306, per Lord Greene MR. In my view it is that reformulation in section 172(1) that is now relevant to the proper purpose duty in section 171(b) in place of the prior judge-made formulation and it is that reformulation which is made subject to section 172(3).

227.                   In agreement with Lord Briggs, I am persuaded that the terms of section 172 of the 2006 Act, when interpreted against the relevant admissible background, recognise the existence of a common law rule that at or near the onset of insolvency and during the insolvency of a company a director’s duty under section 172(1) becomes subject to an obligation to consider and in certain circumstances act in the interests of its creditors. Further, as he states (para 152) there is now a considerable line of authority, including dicta in this court by Justices who were well aware of the reforms of corporate insolvency law in 1985, endorsing such a duty. I also agree with his formulation of the trigger for the engagement of the duty which he sets out in para 203 of his judgment.

228.                   Turning to the second question, there are sound reasons for maintaining the legal duty of directors in relation to the interests of its creditors which section 172(3) recognises.

229.                   It is not in dispute that when performing his or her duty under section 172(1) a director is instructed to have regard to the interests of creditors to the extent that the director is directed to have regard to the interests of employees and to the need to foster the company’s business relationships with suppliers, customers and others. It is also not in dispute that the matters which are set out in section 172(1) to which a director is to have regard are not exclusive as the subsection speaks of the director having regard to those matters “amongst other matters”. In many circumstances the interests of a company’s shareholders and the interests of its creditors will be aligned as both will have an interest in the preservation and enhancement of the company’s assets. But it appears that there was a decision by the CLRSG not to propose the inclusion of the interests of creditors in the listed matters in section 172(1). This is because, as the CLSRG’s last consultation document stated, “these interests are covered by contract while the company is solvent; but if insolvency threatens they override any consideration of the success of the company for members”: “Modern Company Law for a Competitive Economy: Completing the Structure” (November 2000), para 3.12, fn 37.

230.                   Were there no such override on insolvency, our company law in relation to directors’ duties would lack both clarity and coherence. Directors would remain under an apparently unqualified duty in section 172(1) to promote the success of the company for the benefit of its shareholders even when the company was insolvent. They would appear not to be entitled to consider or act in the interests of the company’s creditors as a body in so far as those interests were in conflict with the interests of the company for the benefit of the shareholders. They would be exposed to a serious conflict between their duty under section 172(1) and their personal interest. This is because their duty under section 172(1) would be in conflict with their interest to avoid personal liability under section 214 of the 1986 Act. To my mind section 214 of the 1986 Act does not impose a duty, fiduciary or otherwise, on a director but enables him or her to avoid the liability which it imposes if he or she acts in the way the section specifies.

231.                   Further, it appears to me that in order to make sense of the power of the court to impose personal liability for wrongful trading in section 214 it is implicit that there is a point in time at or near the onset of insolvency at which directors are required to consider and in certain circumstances give priority to the interests of the company’s creditors when they are in conflict with the interests of the company’s shareholders. It is consistent with section 214 that where directors know or ought to know that the company has become irretrievably insolvent, they come under a duty to the company to give priority to the interests of its creditors as a body.

232.                   If this court were to overrule the West Mercia judgment it would be going against the recognition by Parliament of the existence of the common law duty to creditors and its expectation that the courts will develop the law in this area. It would also be creating incoherence between our company law and our law of corporate insolvency and would place directors in a position in which their duties and their personal interest were in conflict. Those are consequences which I cannot support.

233.                   A further, and to my mind very significant, reason in support of the existence of the common law duty is that it assists the professional advisers of company directors to encourage the directors to act responsibly when their company is bordering on insolvency.

234.                   But that does not mean that the courts should ignore the concerns expressed by some members of the CLRSG as to the uncertainty which this duty may create for directors in their decision-making. The common law in this area must be developed with care and in a manner consistent with the predominant statutory regime for corporate insolvency.

235.                   In my view judges must have regard to the fact English common law first recognised the existence of a duty owed by directors of a company in relation to its creditors in the context of the company’s insolvency at a time when Parliament had already occupied part of the field by the enactment of section 15 of the Insolvency Act 1985 which is now section 214 of the 1986 Act. In particular, Parliament chose to give the court a discretionary power to order a director to make such a contribution to the company’s assets as the court thinks fit. It gave this power only in the context of a formal insolvency (a winding up or administration). Parliament also imposed that liability only where at some time before the commencement of the formal insolvency the director “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation” (section 214(2)(b)) and did not at that time take “every step with a view to minimising the potential loss to the company’s creditors” (section 214(3)). Parliament thus laid down clear boundaries to the potential liability which it created. In a field occupied in part by Parliament it would be contrary to principle for the courts to develop the common law in a manner which went against the grain of the parliamentary provision. As Lord Neuberger recognised in In re Lehman Bros International (Europe) (No 4) [2017] UKSC 38; [2018] AC 465, paras 12-13, judge-made rules and principles must be accommodated to the statutory insolvency scheme. He stated (para 13):

“particularly in the light of the full and detailed nature of the current insolvency legislation and the need for certainty, any judge should think long and hard before extending or adapting an existing [common law] rule, and, even more, before formulating a new rule.”

In a different context, in Johnson v Unisys Ltd [2003] 1 AC 518, para 37, Lord Hoffmann stated the principle in more general terms: judicial development of the law “must be consistent with legislative policy as expressed in statutes. The courts may proceed in harmony with Parliament but there should be no discord”.

236.                   A question therefore arises as to the extent to which the imposition on a director of liability for a breach of a common law duty in relation to the company’s creditors in respect of acts and omissions before the onset of a formal insolvency process would be consistent with Parliament’s demarcation of liability in section 214 of the 1986 Act.

237.                   In section 172(3) Parliament has in effect authorised the courts to develop the common law duty of directors in relation to the interests of the company’s creditors as a company nears insolvency. But that development must take place against the backdrop of the pre-existing section 214 of the 1986 Act and the courts must have regard to the boundaries which Parliament placed on the power which it conferred on the courts under that section. Section 214 is not concerned with the fiduciary duties of a director to the company. It creates a remedy where a director has failed to act in the interests of the company’s creditors in circumstances in which he or she objectively should have so acted. Nonetheless, questions will arise as to how far section 214, in which Parliament has identified the circumstances in which liability is to be imposed on directors in the context of insolvency, constrains judicial development of the common law to impose liability and give the company or its liquidator the remedies of an accounting or to order the making of equitable compensation for a breach of a fiduciary duty to the company in relation to the interests of its creditors in circumstances outside those identified in section 214 of the 1986 Act.

238.                   It may be only in rare circumstances that such questions will arise. In many cases when a company is bordering on insolvency, an obligation to consider the interests of a company’s creditors and balance them against the interests of the shareholders will involve directors in making a commercial judgment about the benefits and risks of a transaction or course of action which may not readily be impugned. A reasonable decision by directors to attempt to rescue a company’s business in the interests of both its members and its creditors would not in my view involve a breach of the common law duty. But there may be more egregious circumstances in which the absence of a remedy beyond section 214 would appear to be a lacuna in our law. By way of example, suppose (i) a company has been unsuccessful and the capital of the shareholders has been lost through balance sheet insolvency; (ii) the company’s directors know or ought to be aware in the exercise of their duty of skill and care that a formal insolvency process is more likely than not; (iii) there is a prospect of avoiding the formal insolvency if the company were to undertake a particularly risky transaction; but (iv) the company’s assets that remain and which would be put at risk by the transaction would be lost to its creditors if the gamble were to fail. The shareholders, whether present or future, would probably have nothing to lose from the adoption of the very risky transaction as a last roll of the die because the likely alternative would be a formal insolvency from which they would receive nothing. A requirement that the directors consider and, if the facts of the particular case require it, give priority to the interests of the company’s creditors in their decision-making in such circumstances appears to be a necessary constraint on the directors. I am not persuaded that the directors’ duty to exercise care and skill set out in section 174 fills the gap in the law as, absent the West Mercia duty, the directors would be required to exercise their skill and care to achieve the purpose set out in section 172(1). To my mind the law would be open to justifiable criticism if it were to provide no remedy in respect of the interests of such creditors where such a course of action was proposed or had been adopted in the exclusive interest of the shareholders and to the probable detriment of the company’s creditors without a proper consideration of the interests of the latter.

239.                   It seems arguable at least that it would only be in such extraordinary circumstances that the common law would provide a remedy for breach of fiduciary duty to the company in respect of its creditors in circumstances which occurred before the irretrievable insolvency which may give rise to liability under section 214. But the precise circumstances in which a remedy in an accounting or equitable compensation may exist have not been the subject of any detailed discussion on this appeal and it is appropriate therefore to leave the question of the scope of such liability to be determined in future in a case in which the matter is relevant to the outcome of the appeal.