Directors’ Duties at the Edge of Insolvency : Lessons from BTI v. Sequana for Indian Company law

[Chiranth is a student at National Law School of India University.]

Section 166(2) of the Companies Act 2013 (Act) requires directors to act in the company’s best interests, traditionally understood as those of shareholders. However, common-law jurisdictions have recognized creditors’ interests beginning from West Mercia and Kinsela, and most recently reaffirmed by the UK Supreme Court in BTI v. Sequana (Sequana). The court held that when a company approaches insolvency, directors must consider creditors’ interests. This rests on the logic that creditors, not shareholders, bear the predominant economic risk of repayment from company assets. In addition to creating tensions between shareholder and creditor interests in financially distressed companies, this duty interacts in complex ways with India’s insolvency regime under the Insolvency and Bankruptcy Code 2016 (IBC). 

Against this backdrop, this article examines the implications of directors’ duties to creditors in Indian company law. It considers, first, the trigger for such duties; second, their distinction from wrongful trading under Section 66 and avoidance provisions under the IBC; third, remedies for breach outside the insolvency framework; and finally, practical implications of recognizing these duties.

Sequana Rule and the Duty to Account for Creditors’ Interests

There is no self-standing duty to the creditors as it is not distinct from the directors’ fiduciary duty to act in the interests of the company. The duty is owed to the company, which alone possesses the cause of action. Creditors cannot directly enforce it. Rather, shareholders may bring a derivative action as an exception to Foss v. Harbottle, and during formal insolvency, the resolution professional or liquidator may pursue the company’s cause of action.

Ordinarily, the company’s best interests align with shareholders’ interests in a solvent company ('benefit of its members as a whole' under Section 166(2)). However, given the company’s separate legal personality, there are circumstances where interests of the company shift from shareholders to creditors. For instance, once formal insolvency proceedings commence, creditors’ interests become paramount, as reflected in India’s creditor-in-control model under the IBC. The difficult question, however, is when such duties arise before formal insolvency begins.

Nature and Content of the Duty: Balancing Approach 

The court in Sequana held that a mere “risk of insolvency” is too remote for creditors’ interests to become relevant. The duty arises when a company is actually or “borderline” insolvent, requiring directors to consider creditors’ interests and thereby qualifying the shareholder primacy rule. Here, “insolvency” refers to balance-sheet insolvency (liabilities exceeding assets) or commercial insolvency (inability to pay debts as they fall due), distinct from formal IBC proceedings. However, such interests need not be paramount, since a potential financial turnaround cannot be excluded. As discussed below, this stage precedes and must be distinguished from the “inevitable insolvency” standard for wrongful trading under Section 66(2) of the IBC.

In cases of “borderline insolvency” or actual insolvency, Sequana mandates a balancing exercise between shareholders’ and creditors’ interests, illustrated by Lady Arden’s “sliding scale” analogy (para 303). As the company’s financial condition deteriorates, creditors’ interests gain greater weight. This stage also coincides with well-established limits on shareholders' power to authorise (Duomatic principle) or ratify (ratification principle) actions prejudicing creditors once such duties are triggered. The scope of these duties remains fact-sensitive, depending on relative economic interests and risk allocation between shareholders and creditors. 

Insolvency law framework and the rule in BTI v. Sequana   

A controversial question arises as to whether these fiduciary duties align with the specialized insolvency regime. Section 66(2) of the IBC imposes personal liability on directors for wrongful trading, requiring contribution to the company’s assets if they knew or ought to have known that insolvency resolution was unavoidable and failed to exercise due diligence. While this may overlap with the fiduciary duty to creditors, it differs in content, scope, and temporal application.

First, Section 66(2) is an ex post facto measure operating after the commencement of insolvency proceedings, whereas the directors’ duty is ex ante, as the company’s cause of action may arise before formal insolvency to protect creditors’ interests. Crucially, the fiduciary duty engages earlier than Section 66(2). As recognised in Sequana, Section 66(2)(a) (modelled on Section 214 of the UK Insolvency Act 1986) applies only when insolvency proceedings have become inevitable i.e when there is “no light at the end of the tunnel.” This differs from “borderline insolvency” or insolvency scenarios (balance-sheet or commercial) where some prospect of financial turnaround remains (Sequana, para 120). Creditors’ interests thus become paramount, fully displacing shareholders’ interests, only when insolvency proceedings are inevitable or imminent.

Second, Sections 66(2)(a) and (b) of the IBC combines both subjective and objective elements (due diligence) to minimize losses to creditors. On the contrary, the director duties under common law as stated in Re Smith & Fawcett which is also carried forward in the Act requires a subjective standard (good faith and bona fide, under Section 166(2)) as to the company’s best interests (ClientEarth v. Shell Plc).   

Additionally, similar to wrong trading, the preferential transactions and avoidance provisions in the IBC operate within the relevant time period set out therein, usually only one or 2 years before the commencement of insolvency process. These provisions, as Lord Briggs observed, are “looking backwards” from the insolvency process to reverse the undervalued and preferential transactions.  

Fraudulent transactions impacting creditors

Importantly, Section 66(1) of the IBC renders directors liable to contribute to a company's assets if the business of the company “intends to defraud creditors of the corporate debtor”. Section 49 of the IBC provides for undervalued transactions defrauding creditors to put assets beyond their reach or prejudice their interests. The NCLAT in Aditya Kumar Tibrewal has held that there is no look-back prescribed that applies to these two provisions in insolvency proceedings. Nevertheless, contrary to breach of fiduciary directors’ duties, these provisions require a higher threshold of showing fraudulent purpose and deliberate intent to defraud.

Remedies for Breach of Duty under Legislations and Common Law  

While Section 66 limits directors’ liability to contributing to the company’s assets and the IBC’s avoidance provisions allow restorative orders, breach of fiduciary duties gives rise to a range of equitable remedies, both personal and proprietary, which may be enforced before formal insolvency. As for enforcement, BTI v. Sequana clarifies that creditors cannot sue directors directly or derivatively through the company. Instead, the company itself (through shareholders via derivative action) may bring such claims, extending beyond those available to a resolution professional or liquidator under the IBC.

Section 166(5) provides only for disgorgement of gains made in breach of duty, corresponding to the common law personal claim for an account of profits. However, under common law, the company may pursue both personal and proprietary claims to such profits (see, Section 88, Trusts Act 1882, MK Rajgopalan v. Periasamy). More significantly, remedies against a defaulting director include both gain-based disgorgement and equitable compensation, at the company’s election (Rukhadze v. Recovery Partners GP Limited). Equitable compensation addresses the company’s loss as beneficiary of the fiduciary duty, not merely the director’s gain. From the creditors’ perspective, this remedy is particularly relevant to protect their economic interests before formal insolvency.

For instance, if directors of a balance-sheet insolvent company declare dividends in compliance with statutory rules, there may be no factual finding of subjective intent to defraud creditors under Sections 66(1) or 49 of the IBC, nor does it meet the “inevitable insolvency” standard under Section 66(2). Nevertheless, the directors would be acting in breach of duty if they do not adequately take into consideration the creditors' interests in causing reduction of the company's assets. Here, the director themselves makes no gain to disgorge those profits under section 166(5) of the Act. As clarified in Re BHS Group Limited (2024) which ordered £110 Million compensation to the company for breach of “Sequana duty”, the director would be liable for equitable compensation under the equitable remedies to make good the loss to company’s interests (now representing creditors’ interests).

Moreover, Sequana recognises that there can be instances where even formally lawful dividend distribution, which is in accordance with Chapter VIII of the Act (dividend distribution rules), can be prohibited by the creditors' interests’ duty on directors. In such scenarios, if director duties and common law remedies are considered inapplicable, it will substantially diminish the scope of remedies for breaches of directors’ duties intended to protect creditors’ interest. 

Practical Consequences and Moving Forward  

In conclusion, the balancing or “sliding scale” approach in Sequana is necessarily indeterminate, but such flexibility is preferable in the sphere of directors’ duties. Its core relevance for Indian law lies in recognizing that creditors’ interests must be duly recognised once a company is insolvent or near-insolvent. It also provides guidance on harmonizing general duties of the directors and specialized insolvency law regime under the IBC. The subsequent Hunt v. Singh (2023) EHWC decision makes clear that some form of actual or constructive knowledge of insolvency is required to engage this duty. Going forward, Indian courts can read this duty consistently with common law protections of directors’ business judgment, so that bona fide commercial decisions are not unduly fettered. Practically, the implication is that directors must actively monitor the company’s financial status to identify when their duty to regard creditors’ interests is triggered.