BTI 2024 LLC v Sequana SA

The Court of Appeal considered (1) whether section 423 of the Insolvency Act 1986 can apply to the payment of otherwise lawful dividends and, if so, whether the defendant’s dividend was paid with the requisite statutory purpose, and (2) when directors must have regard to the interests of creditors (the creditors' interests duty), in particular whether that duty is triggered by a "real as opposed to remote" risk of insolvency when directors approve an otherwise lawful dividend.

The court held that section 423 can apply to the payment of dividends: a dividend may constitute a "transaction" under the section (even if not a gift) and may be a transaction entered into for the purpose of putting assets beyond the reach of actual or potential creditors. Applying that test, the judge below was upheld in finding that the May 2009 dividend was paid by AWA with the requisite section 423 purpose and appropriate restorative relief was ordered against Sequana; there was no appeal against the dismissal of the claims in respect of the December 2008 dividend.

On directors’ duties, the court rejected the lower threshold urged by BTI (the “real as opposed to remote” risk test) and held that the creditors’ interests duty arises when the directors know or ought to know that the company is, or is likely to become, insolvent. On the facts the duty was not engaged and BTI’s claims for breach of directors’ duties were dismissed. The Court of Appeal dismissed all appeals and cross-appeals except that Sequana’s cross-appeal as to the date from which a higher commercial rate of interest should run was allowed.

This appeal concerned two sets of challenges to large dividends paid by Arjo Wiggins Appleton Limited (AWA) to its parent Sequana S.A. (the December 2008 €443m dividend and the May 2009 €135m dividend). The claims included: (i) that the dividends were unlawfully paid in breach of the Companies Act 2006 distributable profits rules (the "could not pay" claims); (ii) that the directors breached duties by authorising the payments (the "should not pay" claims); and (iii) alternatively, that the payments fell within section 423 of the Insolvency Act 1986 as transactions at an undervalue entered into for a statutory purpose of putting assets beyond the reach of creditors.

Procedural posture:

• These claims were tried before Rose J in the Chancery Division (cases HC-2014-001215 and HC-2013-00376). AWA’s claims were assigned to BTI 2014 LLC (BTI) and BAT Industries plc advanced a section 423 claim in its own capacity as an alleged victim. Rose J dismissed the counts relating to the December dividend and dismissed the "could not pay" and director-duty claims as to the May dividend, but found the May dividend fell within section 423 and ordered remedies. Sequana and others appealed that section 423 finding and BTI appealed the dismissal of the directors’ duties claim. The appeals came to the Court of Appeal.

Issues framed by the Court of Appeal:

1. Whether section 423(1) can apply to otherwise lawful dividends: is a dividend a "gift", a transaction "for no consideration", or a "transaction" at all under the statutory definitions, and if so whether the payment had the subjective section 423 purpose in that case.
2. When does the directors’ duty to have regard to creditors arise and does it ever arise when directors consider paying an otherwise lawful dividend? Specifically, whether the duty is triggered by a "real as opposed to remote" risk of insolvency, as urged by BTI.
3. Appropriate remedies under section 423 and related ancillary questions (including interest and currency conversion dates).

Court’s reasoning and disposition:

• The court held section 423 may apply to dividends. A dividend is not appropriately characterised as a "gift" in ordinary commercial and legal terms; it is a return on shareholders’ invested capital. Nonetheless, a dividend is a "transaction" within the inclusive definition in section 436 and can fall within section 423(1)(a) as a transaction on terms providing for no consideration. The statutory language and the purpose of section 423, to protect actual or potential creditors from dispositions intended to put assets beyond their reach, support that construction. The court also emphasised that, in many cases (as here), a dividend is part of an arrangement between company and shareholder (for example by set-off) so the bilateral element is frequently present.
• Applying the statutory purpose test in section 423(3), the court endorsed Rose J’s findings that AWA, through its directors, declared the May dividend with the purpose of eliminating the intercompany receivable and clearing the way for a sale so as to remove the risk that Sequana would be called on to meet AWA’s indemnity liabilities; that purpose fell within section 423(3). The remedies fashioned by the judge were discretionary and tailored to restore victims; the court upheld the remedial approach and refused Sequana’s narrower remedy submissions, though it allowed Sequana’s cross-appeal on the date from which a higher commercial rate of interest should run.
• As to directors’ duties, the court rejected BTI’s proposed lower threshold (a "real as opposed to remote" risk of insolvency) and held that section 172(3) preserves the common law position: the creditors’ interests duty is triggered when directors know or ought to know that the company is, or is likely to become, insolvent. On the facts AWA was not so near insolvency and the duty did not apply; accordingly BTI’s directors’ duty claims failed. The court also declined to permit BTI to pursue an unargued alternative proper-purpose claim under section 171 on appeal.

Wider comment: the court emphasised that the precise trigger for the creditors’ interests duty raises significant policy issues and should not be developed by a broad judicial innovation; Parliament has enacted specific protections in company legislation (eg Part 23 and solvency-statement regimes) where it considers additional protection for creditors appropriate.

Appeal allowed in part and otherwise dismissed. The Court of Appeal held that section 423 of the Insolvency Act 1986 can apply to the payment of dividends and, applying the statutory purpose test in section 423(3), upheld Rose J’s finding that the May 2009 dividend was paid by AWA with the purpose of putting assets beyond the reach of potential creditors and ordered restorative relief; the December 2008 dividend-related claims were dismissed below and not appealed. The court rejected BTI’s submission that the directors’ duty to have regard to creditors is triggered by a mere "real as opposed to remote" risk of insolvency, holding instead that the duty arises when directors know or ought to know the company is, or is likely to become, insolvent; on the facts the duty did not arise and the directors’ duties claims failed. All appeals and cross-appeals were dismissed except that Sequana’s cross-appeal on the appropriate start date for a higher rate of interest was allowed.

Appeal from the High Court of Justice, Chancery Division (Rose J) (cases HC-2014-001215 and HC-2013-00376). Judgment of the Court of Appeal delivered 6 February 2019, Neutral Citation [2019] EWCA Civ 112.