Key Points

  • A dividend is a ‘transaction’ and therefore can be challenged under s 423 IA 86
  • A duty to act in the best interests of creditors does not arise simply because there is a risk of insolvency which is not ‘remote’

The Facts

AWA was an entity owned by the Sequana group. Following various corporate acquisitions, BAT became liable for an environmental clean-up in the US and AWA provided BAT with an indemnity for part of that cost and made a provision for such liability in its accounts. A substantial intercompany debt was due from Sequana to AWA which was dealt with by AWA declaring two dividends and setting off those dividend amounts from the intercompany balance. Prior to declaring the second dividend, the decision was taken to sell AWA.

BAT claimed, amongst other things, that the dividend and subsequent sale constituted a transaction to defraud creditors under s 423 IA 86 and was in breach of the directors’ duties to act in the best interests of creditors which BAT argued arose whenever a company faced a risk of insolvency in the future and such risk was not remote. Here, given that the indemnity liability could have been greater than the amount provided for, BAT argued the test had been met.

Decision

The Court confirmed that a dividend was a transaction such that it was susceptible to challenge under s 423. On the facts, the purpose of putting assets beyond the reach of creditors could not be demonstrated for the first dividend, however, for the second dividend, given the decision had been taken to sell AWA and move the potential indemnity liability outside of the group, such purpose was evident.

The Court rejected BAT’s formulation of the test for when directors owe a duty to creditors, holding that it would represent a lowering of the threshold and was not consistent with previous case law. Simply having a long term liability which may prove to be larger than anticipated was not sufficient to require directors to act in the interests of creditors.

Comment

The judgment is a clear statement that a dividend does constitute a transaction meaning it can be challenged as a transaction defrauding creditors where the relevant purpose can be shown. The judgment also clarifies that a ‘not remote’ risk of insolvency does not result in a duty on directors to act in the best interests of creditors but still does not clarify exactly when that duty arises which has been formulated in a variety of different ways in previous judgments.