BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112

BTI claimed directors of AWA breached their duty to creditors by paying a dividend to parent company Sequana, reducing assets available to meet contingent indemnity liabilities. The Court of Appeal upheld the section 423 claim against Sequana for defrauding creditors but dismissed the breach of duty claim, finding the creditors' interests duty was not triggered as AWA was not insolvent or likely to become so.

Facts

Arjo Wiggins Appleton Limited (AWA), a non-trading subsidiary of Sequana SA, had contingent indemnity liabilities relating to environmental clean-up costs for the Lower Fox River in Wisconsin, USA. In May 2009, AWA’s directors resolved to pay a dividend of approximately €135 million to Sequana by way of set-off against an inter-company debt, reducing AWA’s assets significantly. The dividend was paid in compliance with Part 23 of the Companies Act 2006, with directors having properly made provisions for contingent liabilities in accordance with accounting standards. Shortly after, AWA was sold to new owners. BAT Industries plc, a potential creditor of AWA, brought proceedings under section 423 of the Insolvency Act 1986, claiming the dividend was a transaction at an undervalue entered into for the purpose of prejudicing creditors. BTI 2014 LLC, as assignee of AWA’s claims, sought relief for breach of directors’ duties.

Issues

Section 423 Claim

Whether the payment of an otherwise lawful dividend could constitute a ‘transaction at an undervalue’ within section 423(1) of the Insolvency Act 1986, and whether AWA had the requisite statutory purpose of putting assets beyond creditors’ reach.

Creditors’ Interests Duty

When does the duty of directors to consider or act in the interests of creditors arise under section 172(3) of the Companies Act 2006? Specifically, whether the duty is triggered by a ‘real as opposed to remote risk of insolvency’ as contended by BTI, or only when the company is insolvent or likely to become insolvent.

Judgment

Section 423 Claim

The Court of Appeal upheld Rose J’s finding that section 423 applied to the May dividend. David Richards LJ held that a dividend constitutes a ‘transaction’ within section 423(1) and, while not a gift, is a transaction for no consideration within section 423(1)(a). The Judge’s findings that AWA’s purpose in paying the dividend was to put assets beyond creditors’ reach were upheld.

“I have no doubt here that the payment of the May Dividend was entered into with the purpose of eliminating the receivable which then cleared the way to AWA being sold and to Sequana removing any risk of having to fund the indemnity itself if the funds left in AWA proved to be inadequate.” (Rose J at [513])

Creditors’ Interests Duty

The Court rejected BTI’s submission that the trigger for the creditors’ interests duty was a ‘real as opposed to remote risk of insolvency’. David Richards LJ conducted an extensive review of the authorities, including West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 and Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722, and concluded:

“In my judgment, the test of a real, as opposed to a remote, risk of insolvency is not part of the present law as regards the creditors’ interests duty, and it would not be appropriate, in the light of the policy considerations and other provisions of the Companies Act to which I have referred, for the courts to introduce such a test as a development of the common law.”

The Court held that the duty arises when directors know or should know that the company is or is likely to become insolvent, where ‘likely’ means probable. Since AWA was not insolvent and insolvency was not probable at the time of the May dividend, the duty was not engaged.

Implications

This case provides important clarification on two significant areas of company law. First, it confirms that section 423 of the Insolvency Act 1986 can apply to otherwise lawful dividends where the requisite subjective purpose exists. Second, it establishes that the creditors’ interests duty under section 172(3) of the Companies Act 2006 is not triggered merely by a real risk of insolvency but requires actual or probable insolvency. This maintains a balance between protecting creditors and allowing directors appropriate commercial freedom in managing solvent companies. The decision emphasises that Part 23 of the Companies Act 2006 does not occupy the entire field of creditor protection regarding dividends, but sets a higher threshold for triggering the common law duty than BTI contended.

Verdict: Sequana’s appeal on the section 423 claim was dismissed, except for a minor point regarding the date from which enhanced interest rates applied. BTI’s appeal against the dismissal of its breach of duty claim was dismissed. The May dividend was held to fall within section 423 of the Insolvency Act 1986, but the directors were not found to have breached their duties to creditors as the creditors’ interests duty was not triggered.

Source: BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112