On 6 February 2019 the Court of Appeal gave its decision dismissing Sequana’s appeal against a decision of the High Court in 2016, that payment of a dividend by a company can be susceptible to challenge under section 423 Insolvency Act 1986 (IA86).


The original dispute related to two dividend payments made to Sequana by its subsidiary, AWA in 2008 and 2009, which were applied to discharge intercompany debt owed by Sequana to AWA. British American Tobacco (BAT) (by its corporate vehicle, BTI) brought a claim challenging the payment of these dividends because it believed that AWA as a result, was unable to contribute to the substantial cost of cleaning-up environmental damage caused in the US which BAT and AWA were condemned to pay (and for which BAT had the benefit of an indemnity from AWA).

The Court held that the 2009 dividend amounted to a transaction entered into at an undervalue for the dominant purpose of putting assets beyond the reach of AWA’s potential creditor, BAT. Judgment was given against Sequana under section 423 IA86 and (following a further 2 day hearing in January 2017) it was ordered to pay sums to BTI up to the amount of the dividend to be applied in respect of clean-up costs.

The Appeal

Sequana appealed the decision that the 2009 dividend was paid contrary to section 423 IA86 arguing that a dividend was not a transaction at undervalue. The Court of Appeal dismissed Sequana’s appeal holding that:

  1. The language of s423(1) IA86 does not preclude its application to the payment of a dividend. A dividend is not a gift (because it is commercially and legally a return on investment) but it is a transaction for no consideration. It involves the payment of funds beneficially owned by a company to its shareholders in respect of which the company receives no consideration.
  2. There was no justification for reading s423 as qualified by Part 23 of the Companies Act 2006. Section 423 is capable of applying to an otherwise lawful dividend paid in accordance with Part 23. Therefore, the payment of a dividend was within the scope of section 423(1) even if it could not be said to involve an agreement or arrangement between the company and the shareholders.
  3. The High Court Judge had made a clear finding of fact that the requirements of s423(3) were satisfied, namely that the transaction was entered into with the object of putting assets beyond the reach of potential creditors or of otherwise prejudicing their interests.

The practical implications of the decision

A dividend which, on its face, is neither unlawful nor paid in breach of fiduciary duty is capable of being challenged as a transaction defrauding creditors under section 423 IA86. Directors and their advisors should, therefore, exercise caution when paying dividends in circumstances where they have potential long-term contingent liabilities, particularly when made in the context of a restructuring or reorganisation.

Conversely, the fact that payment of a dividend may be open to challenge under section 423 IA86 provides a potential tool in the armoury of litigators. Presumably a dividend also has the potential constitute a transaction at an undervalue in a claim by an officeholder under section 238 IA86.

Sequana has indicated that it intends to appeal to the Supreme Court, so this may not be the last word on the matter.