On 6 February 2019, the Court of Appeal gave judgment on the appeals in BAT Industries Plc v Sequana SA. It upheld the decision of the High Court regarding the legality of a dividend on the grounds that it constituted a transaction defrauding existing or future creditors and AWA’s directors had breached their fiduciary duties by making the dividend payments.
As a brief background, Arjo Wiggins Appleton limited (“AWA”), a subsidiary of Sequana SA (“Sequana”), became liable in respect of very substantial long-term clean-up costs and damages claims arising out of pollution of the Lower Fox River in Wisconsin. BAT Industries plc (“BAT”) was also exposed to these liabilities but had the benefit of an indemnity from AWA.
AWA included a best estimate of the value of this liability within their accounts. AWA then made two dividend payments to its parent company, Sequana, which were applied to discharge an inter-company debt owed by Sequana to AWA. One of these dividend payments was made in December 2008, the second was made in May 2009. As a result of these dividend payments, AWA’s assets were substantially diminished in terms of meeting its environmental liabilities towards the river clean up. In May 2009, AWA’s accounts were finalised and showed substantial losses - following this, the director formed an intent to sell AWA.
High Court Judgment
The aforementioned dividend payments were then challenged by BTI, BAT’s corporate vehicle, on the grounds that:
- AWA’s directors had breached their fiduciary duties by making the dividend payments. This was due to firstly, the uncertainty of the estimated liability, but also the risk that the estimate would be much too low. BTI claimed that due to impending insolvency, the directors of AWA owed fiduciary duties to their creditors rather than its members.
- The dividend payments fell within section 423 of the Insolvency Act 1986, as they were deemed to be transactions that defrauded creditors (or future creditors).
In respect of the first point above, the High Court held that, as AWA could not be described as 'on the verge of insolvency', 'of doubtful insolvency', or in a 'precarious or parlous financial state' when the dividend payments were made, the creditors' interest duty had not arisen and there was no actionable breach of fiduciary duty in making the payments.
However, in respect of the second point, the High Court held that all that needed to be shown to satisfy the section 423 test was that the directors had the subjective intention of moving assets beyond the reach of creditors. The wording of the 1986 Act is deliberately wide in order to protect creditors from assets being moved out of their reach and a dividend could therefore constitute a “transaction”.
The first dividend was not caught but the second dividend was. Upon payment of the second dividend, the subjective intention of the directors was to put assets beyond the reach of its creditors - the Court highlighted that there is no need to show dishonesty or ill will on the part of the directors.
The High Court’s decision was then appealed to the Court of Appeal.
One of the points appealed by Sequana was that a dividend paid to it by its subsidiary AWA constituted a transaction defrauding creditors under section 423.
As above, the High Court had held that there was no need to show that the directors of AWA had 'acted in bad faith’ to satisfy the section 423 test. All that needed to be shown was that the directors had the subjective intention of moving assets beyond the reach of creditors.
First of all, the Court of Appeal confirmed that there was no reason why a dividend could not be considered a 'transaction'. The Court of Appeal also agreed that there was no doubt that the subjective intention of the directors was to prevent claims by creditors against AWA. After the declaration of the dividend, AWA’s creditors were prejudiced because the assets of AWA were exhausted. It was again confirmed that there is no requirement in section 423 to show dishonesty or ill will towards creditors by the directors.
BTI has also appealed against the decision that the dividends had not been paid in breach of the duty of the directors to have regard to the interests of its creditors. In respect of this, the Court of Appeal concluded that the 'creditors’ interest duty' may be triggered when a company’s circumstances fell short of actual, established insolvency. In this case, it was decided that it couldn’t be found that AWA was insolvent, or likely to become insolvent at the time of, or as a result of, the May dividend. Therefore, the Court of Appeal upheld the High Court’s rejection of BTI’s case that the applicable trigger was a 'real, as opposed to a remote risk of insolvency'.
Fiduciary Duty - Directors to take care with long term liabilities
It is certainly noteworthy that the case has held that dividends may be constituted as transactions defrauding creditors. The decision highlights how broad a discretion the Courts have when considering whether a transaction contravenes section 423. Directors should take special care to consider long-term liabilities on their balance sheet and if this may conflict with creditor interests. Clarion has a dedicated Corporate Recovery and Insolvency Team and If any of the matters mentioned above impact you and you require advice, please do not hesitate to contact us.
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