BTI 2014 LLC v Sequana S.A. & Ors

The court reaffirmed that a dividend can constitute a "transaction entered into at an undervalue" within the meaning of section 423 of the Insolvency Act and that the court has a broad discretion under sections 423 and 425 to fashion a restorative remedy to protect victims. The Dividend Claim (BTI v Sequana) was dismissed; the s 423 Claim (BAT v Sequana/AWA) succeeded in relation to the May 2009 dividend because the payment was made for the purpose of putting assets beyond the reach of a creditor (BAT) or otherwise prejudicing its interests.

The judge rejected Sequana's contention that no remedy should be granted because subsequent events made effective restoration impossible, and rejected Sequana's alternative proposal that relief should be limited to reconstituting the inter‑company debt and confined to the liabilities in the Funding Agreement. Instead the court ordered the remedy proposed by BAT: an immediate payment to BTI of $138.4 million (past payments made by BAT and API) and an ongoing liability of Sequana up to a cap equal to the May Dividend grossed up by interest, subject to specified currency conversion and interest rules.

The court included costs of the Kalamazoo liabilities in the remedy, refused to discount the remedy for alleged depletion of AWA assets or the $25m AWA floor in the Funding Agreement, granted certain costs awards (Sequana to pay 50% of trial costs to BAT/BTI; Sequana to pay 70% of Consequentials Hearing costs) with interim payments ordered, but stayed enforcement of the s 423 monetary orders pending Sequana's permission to appeal because of the strength of the legal points and Sequana's fragile finances. Permission to appeal was granted to both sides on specified issues and an application for security for appeal costs was refused.

Background and parties: These consequential hearings followed the Main Judgment ([2016] EWHC 1686 (Ch)). Two related proceedings had been tried together: BTI's claim (the Dividend Claim) and BAT's claim under section 423 of the Insolvency Act 1986 (the s 423 Claim). The May 2009 dividend of €135,181,358.55 was found in the Main Judgment to have been paid with the s 423 purpose; the December dividend was not. The present judgment determines appropriate relief under s 423, costs, stays and permission to appeal.

Nature of relief sought: BAT sought restorative relief under section 423 to recover sums representing funds lost by virtue of the May Dividend: in substance either repayment (or payment into BTI) of sums equivalent to remediation costs already borne by BAT/API and an ongoing liability in respect of future remediation calls up to the grossed-up May Dividend. Sequana contended for no remedy (because of intervening events) or, alternatively, that relief should simply reconstitute the inter‑company debt and be limited to AWA's liabilities under a later Funding Agreement.

Key factual matrix: The judgment sets out extensive post‑May‑2009 developments relevant to remedy: the remediation timetable and costs for the Lower Fox River OU1–5, AWA and NCR payments between 2009–2012, AWA's cessation of payments in April 2012, and the Funding Agreement of 30 September 2014 which allocated historical and ongoing funding obligations between BAT, API, AWA and NCR and provided an AWA asset floor. Subsequent US developments (including the Whiting Consent Decree then negotiated between NCR/API and the US Government) altered prospects for future recoveries and crystallised some exposure allocations.

Issues framed:

• Whether relief under s 423 should be granted given intervening events since May 2009 (including the sale of AWA and the Funding Agreement).
• If relief is appropriate, what form it should take (repayment to AWA, payment to BTI, reconstitution of debt, capped liability, interest rates, currency conversion and inclusion of Kalamazoo liabilities).
• Costs orders (apportionment between the two trials, interim payments), stays of execution pending appeal, and security for costs.

Court's reasoning and findings:

• The statutory purpose of sections 423–425 is to restore assets for the benefit of victims and protect their interests; the court has wide discretion to fashion an appropriate restorative remedy. The existence of intervening events or the impossibility of perfect restoration does not of itself bar relief unless any possible order would be otiose.
• Sequana’s primary contention (that no remedy should be granted because events since 2009 make restoration impossible) was rejected: the sale of AWA and loss of control resulted from the deliberate strategy that produced the May Dividend and cannot justify denying relief to victims.
• Sequana’s alternative remedy (reconstitution of the inter‑company debt limited to AWA liabilities under the Funding Agreement and postponement of calls) was rejected because it would undermine the express bargain in the Funding Agreement that Sequana Recoveries should be paid into BTI in addition to the Funding Agreement liabilities.
• The court adopted BAT’s proposed remedy: immediate payment of $138.4m (the Lump Sum representing remediation expenditures to date by BAT/API) to BTI and an Ongoing Liability of Sequana up to an identified cap equal to the May Dividend grossed up by interest, with specified interest and currency conversion rules. The court included Kalamazoo liabilities in the protective remedy.
• Specific financial mechanics were determined: interest at the inter‑company contractual rate (EURIBOR + 0.25%) from 18 May 2009 until 9 December 2013, and thereafter US dollar LIBOR 12‑month + 2% for grossing up; conversion of $138.4m into euros at €1 = $1.27 (29 September 2014) for the Lump Sum, and conversions of further payments at the closing mid‑market rate on the payment date.
• The court refused to adjust the remedy for alleged depletion of AWA assets or to give Sequana the benefit of the $25m AWA Floor, on the basis that such adjustments would be unfair to the victims and speculative in reconstructing a counterfactual.
• Costs: Sequana ordered to pay 50% of the total trial costs to BAT/BTI (with an interim payment of £5.4m), and 70% of BAT's costs of the Consequentials Hearing (with an interim payment of £378,000). Interest on costs was fixed at 1% above Bank of England base rate until judgment rate applies.
• Stay and appeals: enforcement of the s 423 monetary orders was stayed pending Sequana's appeal because the legal issues were strong and Sequana’s financial position made enforcement likely to stifle the appeal; the information provision to Sequana was not stayed. Permission to appeal was granted to both parties on specified issues. BAT’s application for security for costs of Sequana’s appeal was refused.

Subordinate findings and practical features: The court emphasised its broad remedial discretion under s 423/425, the importance of the Funding Agreement as a commercial mitigation that should not defeat victims’ remedies, and the need to permit future applications to vary the remedy as circumstances change.

First instance: The court dismissed the Dividend Claim and upheld BAT's s 423 claim in respect of the May Dividend. The Court ordered the remedy proposed by BAT: immediate payment of $138.4m to BTI and an ongoing capped liability for Sequana equal to the May Dividend grossed up by interest, with detailed currency conversion and interest rules; included Kalamazoo liabilities in the remedy; rejected Sequana's no‑remedy and reconstituted‑debt alternatives; made specified costs orders and interim payments; granted permission to appeal on specified issues but stayed enforcement of the s 423 monetary relief pending Sequana's appeal due to the strength of legal points and Sequana’s precarious finances.