A cautionary tale for directors when declaring dividends

In BTI 2014 LLC v. Sequana SA & Ors [2019], the Court of Appeal upheld the High Court decision that dividends can be challenged as transactions defrauding creditors under the Insolvency Act 1986.

11 February 2019

In BTI 2014 LLC v. Sequana SA & Others [2019], the Court of Appeal upheld the decision of the High Court that dividends can be challenged as transactions defrauding creditors under section 423 of the Insolvency Act 1986 (the '1986 Act').

The first instance decision:

For a full description of the facts of the case, please see our article published on 11 November 2016.

One of the points appealed by Sequana SA ('Sequana') was that a dividend paid to it by its wholly owned subsidiary Arjo Wiggins Appleton Limited ('AWA') constituted a transaction defrauding creditors under section 423 of the 1986 Act.

Crucially, the High Court had previously held that there was no need to show that the directors of AWA had 'acted in bad faith in the sense of having engaged in sharp practice or recklessness' to satisfy the section 423 test. All that needed to be shown was that the directors had the subjective intention of moving assets beyond the reach of creditors.

What did the court decide on appeal?

Dividend as transaction

The Court of Appeal confirmed that, given the purpose of section 423, there was no reason why a dividend could not be considered a 'transaction'. A dividend payment could be used to put the assets beyond the reach of actual or potential claimants and is no different from any other transaction which is entered into for such a purpose.

Purpose of putting assets beyond reach of creditors

The Court of Appeal agreed that there was no doubt that the subjective intention of the directors was to prevent claims by creditors against AWA. After the declaration of the dividend (and payment by way of set-off against the Sequana debt), AWA’s creditors were prejudiced because the assets of AWA were depleted. It was confirmed that there is no requirement in section 423 to show dishonesty or ill will towards creditors by the directors.

Creditors’ interest duty

The Court of Appeal concluded that the 'creditors’ interest duty' may be triggered when a company’s circumstances 'fall short of actual, established insolvency' thereby upholding the High Court’s rejection of BTI’s case that the applicable trigger was a 'real, as opposed to a remote risk of insolvency'.

What does this mean for directors?

Directors should continue to exercise caution where they have concerns about long-term contingent liabilities and should consider seeking specialist insolvency advice when paying dividends (or entering into other 'transactions') in such circumstances. This is particularly important in the context of restructures and reorganisations in structures where there are long-term contingent liabilities, such as defined benefit pension schemes, lease liabilities or environmental liabilities.

Sequana has indicated that it intends to seek permission to appeal to the Supreme Court and so directors should continue to watch this space…

This article was written by trainee solicitor Ciara Davies.

Key contact

Andrew Eaton

Andrew Eaton Partner

  • Head of Corporate Restructuring and Insolvency
  • Banking
  • Corporate

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