BTI 2014 LLC v Sequana SA : BAT Industries v Sequana SA & Windward Prospects Ltd (2016)


Where a company had on its balance sheet an estimated provision in respect of a long-term liability, there was no justification for holding that the duty to protect creditors' interests under the Companies Act 2006 s.172 applied for the whole period during which there was a risk that there might be insufficient assets to meet that liability. If that were the case, the directors would have to take account of creditors' rather than shareholders' interests when running a business over an extended period.


The claimants brought proceedings for breach of duty against the defendants (D1, D2 and D2's directors) and under the Insolvency Act 1986 s.423.

D2 was a wholly-owned subsidiary of D1. Through a series of corporate acquisitions, the claimants became liable to pay for part of an environmental clean-up operation in the US and D2 was liable to indemnify them for part of that liability. Provision was made in D2's accounts to reflect the directors' best estimate of the value of that liability. In December 2008, based on interim accounts, D2's directors resolved to reduce the company's capital and pay an interim dividend to D1. The directors signed a solvency statement under the Companies Act 2006 s.643 stating their opinion that D2 was solvent. D2's accounts for the year ended 31 December 2008, which were finalised in May 2009, showed that the group had suffered very substantial losses. In May 2009, the directors formed the intention of selling D2 to a third party and resolved to pay a further interim dividend to D1 by releasing a substantial amount of intra-group debt. D2 was subsequently sold. The claimants brought proceedings, asserting that the large reduction in D2's capital was unlawful. They also challenged the payment of both dividends, claiming that the accounts on which the directors had relied in making them did not give a true picture of the company's finances and that inadequate provision had been made for the indemnity liability.

The issues were whether (1) the dividend payments breached Pt 23 of the 2006 Act; (2) the decision to pay the dividends constituted a breach of fiduciary duty by the directors; (3) the dividends constituted transactions defrauding creditors contrary to s.423 of the 1986 Act.


(1) In making a solvency declaration under s.643 of the 2006 Act, the directors must have formed the opinion, required by s.643(1), that there was no ground on which the company could be found to be unable to pay its debts. The absence of reasonable grounds for such an opinion did not render the solvency statement or the reduction of capital invalid. The figure taken into account for the indemnity provision was the best estimate of all those involved. Accordingly, the December dividend did not contravene Pt 23 of the 2006 Act as the interim accounts for that month were sufficient to enable the directors to make a reasonable judgment as to the financial status of the company in order to determine the value of the dividend. The 2008 final accounts had been properly prepared insofar as was relevant for determining whether the May dividend would contravene Pt 23, since they gave a true and fair view of the state of D2's affairs (see paras 305, 320, 322, 327, 332, 344, 400, 429, 454, 527 of judgment).

(2) Section 172 of the 2006 Act required directors to promote the success of the company, subject to any rule of law requiring them to act in the best interests of the creditors. In the instant case, given that D1 was the sole shareholder of D2, a breach of fiduciary duty could only arise if, at the time of declaring the dividends, the directors were bound to consider the interests of the company's creditors and not only D1's interests. There was no justification for holding that, whenever a company had on its balance sheet a provision in respect of a long-term liability which might turn out to be larger than the provision made, the "creditors' interests duty" applied for the whole period during which there was a risk that there would be insufficient assets to meet that liability. That would result in the directors having to take account of creditors' rather than shareholders' interests when running a business over an extended period. In the instant case, D2's balance sheet showed no deficit of liabilities over assets and there were no unpaid creditors. Therefore, the creditors' interests duty had not arisen at the time of the decision to pay either the December or the May dividend and there was no breach of fiduciary duty (paras 458-459, 478-479, 483-484, 527).

(3) A dividend was a transaction entered into at an undervalue within the meaning of s.423(1). There was nothing in the wording of s.423 to exclude the payment of a dividend from the scope of that provision if the payment was made with the purpose, set out in s.423(3), of putting assets beyond the reach of a potential claimant or otherwise prejudicing the interests of such a person. There was no evidence that the directors had had such a purpose in mind when declaring the December dividend. However, there was plenty of evidence to show that their intention when declaring the May dividend was to remove from D1’s group the risk that the indemnity liability might turn out to be greater than the amount available to meet it. The purpose of paying the May dividend by offsetting it against the remaining intra-company receivable was to enable the company to be sold and to prevent D2 having any legal or moral call on its parent company to meet its creditors' claims. Therefore D2, through its directors, had the s.423 purpose when paying the May dividend (paras 502, 505-506, 511, 513, 516, 519, 527).

Judgment for claimants in part