Our last Equity Issues relating to certain corporate questions arising in the case of BTI 2014 LLC v Sequana SA & others considered the circumstances in which the directors of a company are required to consider the interests of creditors and the extent to which the payment of a dividend by a company can be susceptible to challenge under section 423 of the Insolvency Act 1986 (IA 1986).
This Equity Issues considers the other key issue which arose from the case, namely whether the interim dividend payments had the purpose of defrauding creditors under s.423 IA 1986. Section 423 allows claims to be brought where, essentially, a company or individual disposes of its property at an undervalue for the purpose of putting that asset out of the reach of a person who is making, or may at some future time make, a claim against it.
The first question for the High Court was whether the payment of the dividends by the Company was a ‘transaction’ for the purpose of s. 423 and the court held that each of the dividend payments were indeed a transaction and that in construing s. 423, the wording is deliberately wide in order to prevent assets being moved from a potential debtor to the detriment of creditors.
The second question for the court was whether, in respect of each of the dividend payments, the directors of the Company had the s. 423 purpose. That purpose (which is assessed subjectively and not objectively) need not be the dominant purpose, but must also not simply be a consequence of the transaction.
In relation to the first dividend, the court found that the s. 423 purpose was not present. The actual purpose of the dividend was to make a payment following a capital reduction exercise and to remove surplus cash from a non-trading subsidiary so that it could be utilised elsewhere, rather than to simply sit on the Company’s balance sheet, which did not prejudice the Company’s creditors.
However, the court found that the s. 423 purpose was present in relation to the second dividend as various developments had occurred in the interim, in particular the fact that the Company would be sold outside of its group. The judge held that the circumstances had to be looked at as a whole and not just limited to the payment of the second dividend in order to determine the purpose and that it was inherent in the wording of the first part of the s. 423 purpose (putting assets beyond the reach of a person who is making or may make a claim) that the transaction resulted in the debtor having insufficient funds with which to satisfy any claim. In this case, the Company’s liability was subject to great uncertainty that would likely only be finally determined over a number of years. As the Company was without recourse to any other means, the creditor in this case was prejudiced by the payment of the second dividend.