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The Court of Appeal has recently ruled in BTI 2014 LLC -v- Sequana SA & Ors  EWCA Civ 112 that an otherwise lawful dividend may still be found to be a transaction defrauding creditors. In addition, the Court of Appeal ruled that, whilst the duty to act in the interests of creditors is engaged at a point when the company’s circumstances fall short of actual, established insolvency, there however needs to be more than “a real, as opposed to remote, risk of insolvency” for the duty to be engaged.
The Appellant (“BTI”) sought to appeal a decision made by Rose J of the court of first instance that a dividend payment to the Respondent (“Sequana”) was not paid in breach of the directors’ duties to have regard to the interests of its creditors, as defined in Section 172 (3) of the Companies Act 2006 Part 23 (the “CA 2006”).
Sequana cross-appealed against the decision of the lower court on the basis that the dividend payment was not an undervalue transaction within the meaning of Section 423 (1) of the Insolvency Act 1986 (the “IA 1986”) and further, that the directors did not authorise the dividend payment with the intention to defraud creditors or otherwise prejudice their interests within the meaning of Section 423 (3) of the IA 1986.
The dividend payment which forms the heart of this appeal, referred to as “the May Dividend”, was paid by the predecessor claimant company “AWA” to its parent company Sequana. The dividend payment was made in circumstances where AWA had ceased to trade and was on the brink of insolvency. AWA’s assets included an inter-company debt owed to it by its parent company Sequana. The dividend was paid by the amount of the dividend being set off against the inter-company debt owed by Sequana.
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When Do Directors Owe Their Duties to a Company’s Creditors Rather Than Its Shareholders?