Shifting sands: directors’ duties as a gradient

For decades, two assumptions influenced how directors and their advisers approached financial distress. The first was that directors’ duties were binary: when a company was solvent, they were owed to shareholders, but as insolvency approached, they would be owed to creditors instead. The second was that the Insolvency Service’s civil enforcement powers were principally associated with failed or dissolved companies.

However, more recent developments have caused a shift away from these assumptions. The Supreme Court’s decision in BTI 2014 LLC v Sequana SA [2022] UKSC 25 has clarified when directors must consider creditors’ interests as a company moves into financial difficulty and, more recently, the Insolvency Service’s Corporate Civil Enforcement Reforms consultation, published in March 2026, has proposed changes intended to strengthen and modernise the civil enforcement regime.

Whilst the Insolvency Service’s proposals have not yet become law, taken together with the Sequana decision, they underline the need for directors to be well-informed of what is expected of them and their decision-making when it comes to instances of encroaching financial distress. Given the evolving nature of this space, it is worth examining the details in greater depth.

The Sequana framework: a developing duty, not a switch

The section 172 duty in the Companies Act 2006 requires directors to act in a manner which is likely to promote the company’s success for the benefit of its shareholders. Section 172(3) provides a caveat to this requirement, specifying that:

“The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.”

In Sequana, the Supreme Court confirmed that section 172(3) of the Companies Act 2006 preserves the common-law rule requiring directors, in certain circumstances, to consider or act in the interests of creditors and, in so doing, rejected a mere “real risk” of insolvency as sufficient to engage that rule.

The Justices of the Court did not agree on a precise trigger point for when directors should start to consider the interests of creditors in the insolvency context. However, their judgments do support the following practical framework:

1. Creditors’ interests become relevant when the company is insolvent or bordering on insolvency, or when an insolvent liquidation or administration is probable. Directors should not assume that a merely technical balance-sheet position provides a safe dividing line.
2. As the company’s financial position deteriorates, greater weight must be given to creditors’ interests. Before insolvency is inevitable, those interests may need to be balanced against shareholders’ interests.
3. Where insolvent liquidation or administration is inevitable, creditors’ interests become paramount because shareholders no longer retain a legitimate interest in how the company’s remaining assets are managed.

In practical terms, directors should not rely on a single, bright-line moment at which their focus should change from shareholders to creditors. The weight to be given to creditors’ interests develops with the company’s circumstances. Decisions made while a company is still solvent may therefore be examined later if the company was already bordering on insolvency or an insolvent outcome was probable.

The proposed enforcement reforms: earlier and more flexible intervention

The March 2026 consultation does not itself change the law. Instead, it seeks views on 11 options to modernise the corporate civil enforcement regime administered by the Insolvency Service. The options include structural reforms, stronger information-gathering powers and procedural changes to director disqualification. If implemented, they could allow earlier and more proportionate intervention in relation to misconduct connected with live companies, rather than relying on enforcement with regards to misconduct that has been identified after corporate failure.

Proposals with practical relevance for directors include:

1. Wider information-gathering powers: the consultation considers strengthening the Insolvency Service’s ability to obtain information when investigating suspected corporate abuse, including in relation to live companies.
2. Tailored director restrictions: instead of an outright disqualification in every case, the consultation proposes a more flexible regime that could impose restrictions on directors which are proportionate to the misconduct and the risk posed.
3. Faster routes to remove directors from the market: a proposed route includes an accelerated process where companies have been wound up in the public interest because their activities caused harm.
4. Procedural reform: the consultation also considers changes intended to make disqualification proceedings more efficient, while retaining fairness and clarity for those involved.

The combined impact for owner-managed and mid-market businesses

The combination of the Sequana principles and the proposed reforms is particularly relevant to owner-managed and mid-market businesses, where governance arrangements may be less formal and directors are often closely involved in day-to-day financial decisions. Common pressure points include:

1. Connected-party transactions, intercompany loans and dividend decisions that may be commercially routine when a company is financially stable but require closer scrutiny when its financial position deteriorates.
2. Financial distress that develops gradually, making it difficult to identify when creditors’ interests should begin to influence board decisions.
3. Limited in-house legal or restructuring resource, increasing the importance of timely advice and clear contemporaneous records.

The key risk is not simply that the company may fail. Decisions made before a formal insolvency process begins may later be scrutinised against the company’s financial position at the time, the information available to the directors and the extent to which creditors’ interests were considered.

What this means for directors: practical steps

1. Monitor the company’s financial position closely: use up-to-date management information, short-term cash-flow forecasts and realistic downside scenarios to identify deterioration early.
2. Review connected-party transactions carefully: record the commercial rationale, valuation evidence and anticipated effect on the company and its creditors.
3. Formalise decision-making: board minutes should record the financial information considered, the available options, the interests affected and the reasons for the decision.
4. Take advice early: directors should seek legal and restructuring advice before the position becomes critical, particularly where solvency is uncertain or a significant transaction is proposed.

Conclusion

Sequana confirms that the weight directors must give to creditors’ interests increases as a company’s financial position worsens; it is not governed by a single mechanical switch. Meanwhile, the Insolvency Service’s consultation points towards a civil enforcement framework that may allow for earlier intervention in companies, but the proposals remain subject to the outcome of the consultation and any subsequent legislation. Directors should therefore monitor the company’s position, review decisions as circumstances change and keep clear records of the reasons for acting in order to keep ahead of a potentially tightening enforcement climate.