BAT Industries Plc v Sequana

The court considered two interlinked sets of claims arising from two interim dividends paid by Arjo Wiggins Appleton Limited (AWA) to its parent Sequana in December 2008 and May 2009. The key legal issues were (i) whether those distributions contravened Part 23 of the Companies Act 2006 because the accounts relied on did not give a true and fair view or otherwise failed the statutory requirements for distributions; (ii) whether the directors breached fiduciary duties (including the duty to have regard to creditors when appropriate); and (iii) whether the May or December dividends were transactions at an undervalue under section 423 of the Insolvency Act 1986.

The judge held that the December and May dividends did not contravene Part 23. The solvency statement procedure under section 643 was properly applied in December 2008, the capital reduction was effective notwithstanding a clerical error in the memorandum of capital, and the accounting provision for the US Lower Fox River liability was a permissible best estimate made in accordance with applicable accounting practice (FRS 12) and supported by advisers and auditors. The court also held that the creditors'‑interests duty had not arisen so as to make payment of the dividends a breach of fiduciary duty. Finally, the court found that, for the purposes of section 423, a dividend can be a transaction at an undervalue; BAT's s.423 claim was dismissed as to the December dividend but succeeded in relation to the May dividend because the May transaction was entered into with the purpose of putting assets beyond the reach of a potential claimant.

This first instance Chancery trial arose from two related claims following the payment by AWA of two interim dividends to its parent Sequana: a December 2008 payment of €443m and a May 2009 payment of c.€135m. The payments reduced a large intra‑group receivable and culminated in the sale of AWA. The underlying commercial cause was AWA’s indemnity exposure for the contaminated Lower Fox River in Wisconsin, United States, addressed under CERCLA, and related insurance rights (the Maris Policy and historic BAT insurance policies).

• Parties and procedural posture: two sets of proceedings were tried together: BAT's claim (HC‑2013‑00376) under s.423 Insolvency Act 1986 and BTI's claim (HC‑2014‑001215) assigned from AWA, alleging unlawful distributions under Part 23 CA 2006 and breaches of directors' duties.
• Relief sought: declarations and recovery of dividends said to be unlawful or unconscionable, claims in restitution/unjust enrichment, and an order under s.423 to restore assets transferred at undervalue.
• Issues framed: (i) validity of the December 2008 solvency statement and capital reduction (s.643 CA 2006 and s.644 registration rules); (ii) adequacy of the Fox River provision in interim and final accounts (FRS 12 / Companies Act accounting requirements); (iii) directors’ duties to creditors and whether they were engaged; and (iv) whether the payments were transactions at an undervalue within s.423 IA 1986 and entered into with the proscribed purpose.

Reasoning: the judge examined the factual matrix in detail (sequence of estimates, expert reports, PCC models, AON and PwC work, and the decisive US Supreme Court decision in Burlington Northern). On company law and accounting the court accepted that provisions are best‑estimate exercises governed by FRS 12 and that auditors’ agreed‑upon procedures and professional advice may legitimately inform directors. The solvency statement under s.643 was held to require that directors actually form the required opinions taking contingent liabilities into account, but not to require a ‘worst case’ or impossibly stringent test. The directors had formed the opinions reasonably and prudently, leaving significant buffers and relying on expert analysis; the capital reduction was effective despite a clerical error in the memorandum of capital. On fiduciary duties, the creditors'‑interests duty did not arise because AWA was not on the verge of insolvency; the business was a non‑trading containment vehicle and the directors had taken a commercially reasonable approach to the provision and buffer. On s.423 the court held that dividends can fall within the section; the December dividend was not made with the s.423 purpose, but the May dividend was paid as part of a sequence of steps (reduction, distribution, sale) intended to externalise risk and thereby put assets beyond the reach of a foreseeable claimant, so BAT succeeded on its s.423 claim in respect of the May dividend.

Remedies and concluding posture: BTI’s Part 23 / fiduciary claims were dismissed. BAT’s s.423 claim succeeded only in respect of the May dividend; the judge did not finally determine the specific remedial orders to be made in that event without fuller factual account of subsequent events.

First instance: the court dismissed the statutory and fiduciary claims brought by BTI (and AWA’s assigned claims) that the December 2008 and May 2009 dividends contravened Part 23 CA 2006 or were breaches of directors’ duties. The court found the solvency statement of 15 December 2008 valid, the capital reduction effective, and the accounting provision for the Lower Fox River to be a permissible best estimate. However, in separate proceedings by BAT under section 423 IA 1986 the court held that the May 2009 dividend was a transaction entered into with the purpose of putting assets beyond the reach of a claimant and therefore that claim succeeded as to the May dividend (the December dividend did not meet the s.423 purpose). The court reserved detailed remedial orders pending assessment of subsequent events.