Dispute Resolution

The judgment of the English and Welsh Court of Appeal in BTI 2014 LLC v Sequana SA & Ors highlights the importance of company directors’ duty to have regard to creditors’ interests. This duty arises when they knew, or should have known, that the company was or was likely to become insolvent.

Background

The initial case concerned the payment of dividends by Arjo Wiggins Appleton Limited (AWA) to its parent company, Sequana SA. At the time of payment, AWA had ceased trading, but had one material liability for a sum unknown.

The directors’ decision to authorise the dividend was challenged on several grounds, including under Section 423 of the Insolvency Act 1986 (“Section 423”). This wide-reaching provision affords protection to actual and potential creditors in circumstances where a debtor puts assets beyond their reach, or otherwise prejudices their position. Section 423 applies in England and Wales only.

Case at first instance

The High Court found that the payment of dividends did fall under the ambit of Section 423, namely that it was a transaction for an undervalue and was undertaken with the intention of putting assets beyond the reach of the company’s creditor. Interestingly, the court concluded that there was no need for the directors to have acted in bad faith. Sequana SA appealed the decision

Appeal

The questions before the court were:

  1. Is it possible, as a matter of law, for the payment of a dividend to be a transaction within the meaning of Section 423; and
  2. If this is possible, was the dividend in question paid with the requisite statutory purpose of putting the assets beyond the reach of creditors?

The court found that:

  1. The payment of dividend did fall under the scope of Section 423; and
  2. This particular dividend was paid with the purpose of putting the assets beyond the reach of the creditor.

In relation to the second question, the court made plain that it was a question of fact: what were the directors aiming to achieve by the paying the dividend? In this case, the directors’ aim was to divest the company’s assets beyond the reach of the creditor. Crucially, this does not have to be the sole or even dominant purpose of the transaction.

In addition to clarifying the application of Section 423 to the payment of dividends, the court outlined the circumstances under which the directors’ common law duty to have regard to creditors’ interests is triggered. The court held that this duty “arises when the directors know or should know that the company is or is likely to become insolvent”.

What does the judgment mean?

Section 423 can be a powerful tool for any party seeking relief in respect of prejudicial transactions. In this case, the liquidator of AWA can demand that the dividend be paid back. The Court of Appeal has refused permission for a further appeal, but it remains open to the appellants to apply to the Supreme Court.

Practical application

This judgment is important for companies and directors. Directors should:

  • Obtain regular legal advice regarding discharging their duties.
  • Ensure they receive regular financial reports.
  • Never pay a dividend to shareholders “on account”.
  • Consider and document the purpose of any transaction, including the payment of dividends.
  • Consider and document the interests of company creditors.
  • Obtain specialist insolvency advice if the company is likely to become insolvent.

 

For more information, please contact Mary Ellen Stewart or your usual Brodies contact.

Mary Ellen Stewart

Solicitor at Brodies LLP
Mary Ellen is a solicitor in the Business Disputes & Asset Recovery Team and specialises in commercial litigation.
Mary Ellen Stewart