The Court of Appeal (CoA)’s recent judgment clarifying the precise nature of dividends and transactions under s423 Insolvency Act 1986 (s423) means that dividends remain susceptible to challenge under that section, and that a director’s duties to act in accordance with the best interests of creditors can be triggered when a company is not actually insolvent. Care should be taken when considering declaring a dividend to ensure no creditors (whether intentionally or unintentionally) are affected.
AWA (a UK registered company and subsidiary of French conglomerate Sequana SA) was exposed to substantial, long-term environmental liabilities in the US in relation to the clean-up of rivers including Fox River in Wisconsin, polluted by paper mills. BAT Industries Plc (BAT) was also exposed to these liabilities but had the benefit of an indemnity from AWA.
AWA’s assets included an intercompany debt owed by Sequana worth €583m.
In December 2008 AWA declared a dividend in the sum of €443m, offset against the intercompany debt. In May 2009 AWA declared a further dividend in the sum of €135m, again offset against the intercompany debt. These transactions reduced AWA’s assets and it was later sold by Sequana.
AWA (later replaced by BTI) brought claims against the directors who authorised the dividends and against Sequana as a constructive trustee on the basis that the dividends were not lawfully paid in accordance with the Companies Act 2006 and were paid in breach of the duty of the directors to have regard to the interests of the creditors.
BAT also brought a claim against Sequana in its capacity as a ‘victim’ that the dividends amounted to transactions defrauding creditors within the meaning of s423.
High Court dismissed claims on first dividend
In February 2017 Rose J sitting in the High Court dismissed all claims relating to the December dividend, but found that the May dividend did amount to a transaction defrauding creditors under s423 of the Insolvency Act 1986 and ordered Sequana to pay to BAT/BTI $138m.
Sequana appealed the decision on two grounds:
• The May dividend was not a transaction at under value within the meaning of s423(1); and
• It was not paid with the purpose of putting the dividend monies beyond the reach of BAT.
The COA handed down judgment in February, examining whether the dividend fell within s423, and broke it down into three sections:
Is a dividend a gift?
Sequana submitted that a dividend was not a gift but a return on the investment that the shareholder had made when the share was issued. The COA accepted this submission and stated that rights are conferred on shareholders in respect of dividend by the terms of the issue of the shares (or by the articles) and that shareholders receive dividends pursuant to those rights.
Is a dividend a transaction on terms that provide for the payee to receive no consideration?
The COA stated that ‘it cannot be said that a company receives consideration for the payment of a dividend and it is not enough to say the dividend is paid in accordance with the rights attached to the shares’. The COA further stated that the dividend may come within the second limb of s423(1) (a) but it held that that reading of the provision would be too literal.
Is the payment of the dividend a transaction within the meaning of s423 (1)?
The COA held that the May dividend formed part of an arrangement between Sequana and AWA and that Sequana as the parent company was closely involved in the decision to pay the dividend. The formalities of the dividend demonstrate the arrangement. The dividend was not paid in cash but, with the agreement of Sequana, was set off against the intercompany debt, thus amounting to an arrangement.
The CoA upheld Rose J’s Judgment that the May dividend did fall within the meaning of s423. This decision is consistent with previous authorities, and has provided further welcome clarification on the broad remedial discretion in response to a transaction that contravenes s423.