BTI 2014 LLC v Sequana S.A. & Ors

A dividend is a return on investment, rather than a gift, but constitutes a transaction for which the company receives no consideration within section 423 of the Insolvency Act 1986. Compliance with statutory distribution requirements does not exclude liability under that section. The prohibited purpose must be positively intended, but need not be the sole or dominant purpose. Relief may reflect subsequent arrangements influenced by the impugned transaction.

The directors’ duty to consider creditors’ interests is owed to the company. It arises when directors know or should know that the company is insolvent or probably will become insolvent. A real risk of insolvency falling short of probability is insufficient. The duty can restrict otherwise lawful dividends. Whether creditors’ interests become paramount throughout the circumstances engaging the duty was left open.

Arjo Wiggins Appleton Limited (AWA), a wholly-owned subsidiary of Sequana SA, had ceased trading. Its principal obligations were contingent indemnity liabilities associated with pollution of the Lower Fox River in the United States. Its assets included an investment policy, rights under historic insurance policies and a substantial debt owed by Sequana. AWA paid two dividends to Sequana by setting them off against that debt.

BTI 2014 LLC, a vehicle established by BAT Industries plc, acquired AWA’s claims against its directors and Sequana concerning the dividends. BAT, a potential creditor under the indemnity arrangements, separately challenged the dividends under section 423 of the Insolvency Act 1986. Rose J dismissed every challenge to the December dividend. For the May dividend, she dismissed the claims concerning unlawful distribution and breach of directors’ duties, but upheld BAT’s section 423 claim.

Sequana appealed against section 423 liability and the relief ordered in the remedies judgment, [2017] EWHC 211 (Ch). BTI appealed against dismissal of its directors’ duties claim. BAT cross-appealed concerning currency conversion. The appeals concerned whether an otherwise lawful dividend could fall within section 423, whether the necessary purpose existed, the appropriate remedy, and the circumstances triggering directors’ obligations concerning creditors’ interests.

1. All appeals and cross-appeals were dismissed, save for Sequana’s challenge concerning the date from which the higher interest rate applied. David Richards LJ’s reasons were adopted by Henderson and Longmore LJJ.

2. A dividend was a return on the investment represented by the shares and therefore was not a gift. Nevertheless, the company received no consideration for its payment. Shareholders’ existing rights did not make undistributed profits their property. The tax analysis in Inland Revenue Commissioners v Laird Group plc did not establish otherwise (paras 39–50).

3. A dividend constituted a transaction within section 423(1) of the Insolvency Act 1986, even without an agreement or arrangement with shareholders. The statutory language did not impose a general requirement of bilateral dealing. Independently, the agreed set-off and executed cross-receipt established an arrangement between AWA and Sequana. Part 23 of the Companies Act 2006 did not qualify section 423 (paras 58–64).

4. The relevant purpose was AWA’s subjective purpose, identified through its directors. A prohibited purpose need not be sole or dominant, but must be intended rather than merely consequential. The dividend and subsequent sale formed a sequence intended to remove Sequana’s legal and moral exposure. Eliminating its debt removed an asset available to AWA’s creditors. The judge had made the necessary findings concerning AWA itself (paras 65–75).

5. The remedy could exceed AWA’s obligations under a later settlement where those obligations had been influenced by the position created by the dividend. The judge could fashion relief reflecting the resulting uncertainties. A smaller dividend that merely could have been paid provided no basis for reducing relief. Whether a proved alternative dividend that would have been paid required adjustment was left open. Currency conversion properly reflected when the debt would probably have been called. There was no proper basis for applying the higher interest rate from commencement of proceedings (paras 86–104).

6. The creditors’ interests duty was owed to the company and preserved by section 172(3). It arose when directors knew or should have known that the company was insolvent or likely to become insolvent. Here, likely meant probable. A real risk alone was insufficient. The accepted accounting estimate did not establish probable insolvency, so BTI’s claim failed. The general question of paramountcy was reserved, although creditors’ interests appeared necessarily paramount where directors knew or ought to know of actual insolvency (paras 149, 192–222, 228–229).

7. Statutory distribution rules did not occupy the whole field. An otherwise compliant dividend could breach the creditors’ interests duty, including where it caused cash-flow insolvency. Shareholders could not ratify such a breach. BTI could not revive its abandoned improper-purpose claim on appeal. The section 423 findings did not themselves establish the different purpose requirements under section 171. Where the creditors’ interests duty was disengaged, shareholder ratification or consent defeated the alternative company claims (paras 224, 230–236).

1. Court of Appeal (Civil Division): In [2019] EWCA Civ 112 , dismissed BTI’s directors’ duties appeal, upheld section 423 liability and substantially upheld the remedy. Allowed Sequana’s challenge concerning the commencement date for the higher interest rate and dismissed BAT’s currency-conversion cross-appeal.
2. High Court, Chancery Division: Rose J’s remedies judgment, [2017] EWHC 211 (Ch) , dated 10 February 2017, ordered reimbursement of past remediation payments and further payments within a limit based on the May dividend plus interest.
3. High Court, Chancery Division: Following a 32-day trial, Rose J dismissed all challenges to the December dividend. She dismissed the unlawful-distribution and directors’ duties challenges to the May dividend but upheld BAT’s claim under section 423 of the Insolvency Act 1986. The citation of that merits judgment is not stated in the judgment. The distribution-law findings and the December-dividend decision were not appealed.