Court of Appeal: Dividends may be transactions at an undervalue

by Emma Halton 

The Court of Appeal has held1 that dividends may be challenged under section 423 of the Insolvency Act 1986 (“s423”), which allows a court to set aside a transaction by a company if it is at an undervalue, with the purpose of either putting assets beyond the reach of creditors or otherwise prejudicing some person.

BAT Industries plc (“BAT”) was liable to contribute to the costs of remedying certain environmental damage in Wisconsin, USA. Arjo Wigging Appleton Limited (“AWA”) was required to indemnify BAT for part of those costs. In December 2008 and May 2009, the directors of AWA resolved to pay dividends to AWA’s sole shareholder, Sequana SA (“Sequana”).

An estimate for AWA’s liability to BAT was reflected in AWA’s accounts, and it was found that the directors’ decisions as regards the provisions were properly made and the accounts were properly prepared, so the dividends were paid in compliance with the statutory requirements.

Each dividend was paid by the amount of the dividend being set-off against an inter-company receivable due from Sequana to AWA. The effect of the dividends was to significantly reduce the value of AWA’s only asset (the receivable owed to it by Sequana) and put the amount of the dividends beyond the reach of BAT.

The Court of Appeal held that the wording of s423 is deliberately wide, to protect creditors, and that dividends fell within the scope of “transactions” for the purposes of that section. It also found that the second dividend was motivated by Sequana’s desire to reduce the debt it owed to AWA, so as to be able to sell AWA, and therefore the relevant purpose was present when the second dividend was paid. Accordingly, the second dividend (although not the first) would be set aside. The court also emphasised that in order to satisfy the s423 test, there is no need to show dishonesty or ill will on the part of the directors.

Thus, it is possible for the court to set aside dividends for which all proper company law procedures have been followed.

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1BTI 2014 LLC v Sequana SA & Ors [2019]

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