BTI 2014 LLC v Sequana S.A. & Ors

An otherwise lawful dividend may be a transaction at an undervalue under section 423 of the Insolvency Act 1986. A dividend is not a gift, but its payment ordinarily provides the company with no consideration. It may therefore fall within the section, including where it is paid as part of an arrangement with the shareholder.

The statutory purpose is subjective. It need not be the sole or dominant purpose, but must be a purpose rather than a mere consequence. Directors must consider creditors’ interests when they know, or should know, that the company is insolvent or likely to become insolvent. A real, rather than remote, risk of insolvency is insufficient.

AWA, a non-trading subsidiary of Sequana S.A., had contingent environmental indemnity liabilities and a substantial inter-company debt owed by Sequana. In May 2009 AWA paid a €135.18 million dividend to Sequana by setting it off against that debt, shortly before Sequana sold AWA.

Rose J held that the dividend complied with Part 23 of the Companies Act 2006. She dismissed the claim that AWA’s directors breached their duties, but held that the dividend contravened section 423 of the Insolvency Act 1986 and made restorative orders. Sequana appealed the section 423 liability and remedy. BTI appealed the dismissal of its directors’ duties claim, and BAT cross-appealed on currency conversion.

The central issues were whether a lawful dividend can fall within section 423, whether it was paid for the statutory purpose, and when directors must have regard to creditors’ interests.

1. Sequana’s appeal succeeded only on interest. The court upheld the finding that the May dividend was within section 423 of the Insolvency Act 1986 and that AWA entered into it with the statutory purpose. The court allowed Sequana’s challenge to the date from which the higher interest rate ran. All other appeals and cross-appeals were dismissed.

2. A dividend is not a gift. It is a return on the shareholder’s investment. However, payment of a dividend is capable of being a transaction at an undervalue because the company receives no consideration for it. The statutory language does not confine section 423 to bilateral dealings. In any event, this dividend was part of an arrangement between AWA and its sole shareholder, including the agreed set-off and cross-receipt.

3. The relevant purpose under section 423(3) was AWA’s subjective purpose, acting through its directors. The purpose need not be dominant or sole. The judge had found that the dividend eliminated the inter-company debt so that AWA could be sold and Sequana would no longer face the risk of having to fund AWA’s indemnity liabilities. That involved putting AWA’s asset beyond the reach of actual or potential claimants. The finding was therefore upheld.

4. The remedy was within the judge’s broad discretion to restore the pre-transaction position and protect victims. The Funding Agreement did not confine relief to AWA’s obligations under that agreement. The judge was entitled to find that the agreement and its limits had been influenced by the position created by the dividend. The higher rate of interest should, however, run only from 30 September 2014, when a payment need first have been made, rather than from the commencement of proceedings.

5. The creditors’ interests duty preserved by section 172(3) of the Companies Act 2006 arises when directors know or should know that the company is insolvent or likely to become insolvent. In this context, likely means probable. It is not enough that insolvency is a real, rather than remote, risk. AWA was not insolvent and was not likely to become insolvent on the unchallenged findings about its provision and available assets. Its directors therefore owed no operative creditors’ interests duty when they approved the May dividend.

6. Part 23 does not occupy the whole field. A dividend may comply with the statutory distribution rules yet breach directors’ duties if it leaves a company unable to pay debts as they fall due. BTI could not revive on appeal its unpursued improper-purpose claim under section 171, and its section 174 claim also failed. In the absence of an engaged creditors’ interests duty, the sole shareholder’s consent could ratify any such breach.

• Court of Appeal (Civil Division): Allowed Sequana’s appeal only as to the date from which the higher interest rate ran. It otherwise upheld the section 423 remedy and dismissed BTI’s appeal concerning directors’ duties.
• High Court, Chancery Division: Rose J dismissed all December-dividend claims. In relation to the May dividend, she dismissed the claims under Part 23 and for breach of directors’ duties, but granted relief under section 423 of the Insolvency Act 1986. Her later remedies judgment was [2017] EWHC 211 (Ch).