Caution urged over directors declaring dividends following Court of Appeal decision

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The Court of Appeal has upheld a High Court decision which has practical implications for directors declaring dividends in companies.

In BTI 2014 LLC v Sequana, the Court of Appeal confirmed that a dividend payment, which strips money out of a company and away from its creditors, may be challenged as a potential transaction defrauding creditors, even if it was otherwise paid lawfully.

Directors who are considering declaring dividends must have particular regard to the creditor position of the company, including contingent liabilities. Going forward, this may have a significant impact on company restructuring and reorganisations.

Equally, creditors or insolvency practitioners may now have another weapon in their armoury to challenge these types of transactions.


Sequana received two dividend payments from one of its subsidiaries. The first of €443m, paid in December 2008, was followed by a payment of €135m in May 2009. These were challenged on three grounds:

  1. That they were not made lawfully out of distributable profits;
  2. They were made in breach of the directors’ duties to have regard to the interests of the creditors;
  3. The dividends were transactions defrauding creditors under section 423 of the Insolvency Act 1986.

The High Court held that the dividends were lawfully made from distributable profits. Part 23 of the Companies Act 2006 stipulates when a company may make a lawful distribution to its shareholders. The central provision is that a company may only make a distribution out of profits available for that purpose – its accumulated realised profits less its accumulated realised losses. The High Court held that the payments were made in compliance with these rules and were lawfully made. No appeal was brought on that finding.

The High Court also held that there was no breach of the directors’ duties in declaring the dividends. This element was appealed by BTI, but that appeal was dismissed.

However, the ground-breaking element of this case relate to the third argument; whether the dividends were capable of being a transaction defrauding creditors. The High Court held that the May 2009 dividend was such a transaction, and the Court of Appeal upheld that decision.

Transaction Defrauding Creditors

Section 423 of the Insolvency Act 1986 is a wide-ranging provision designed to protect actual and potential creditors where a debtor takes steps for the purpose of putting assets beyond their reach or otherwise prejudicing their interests. Unlike other areas of the Insolvency Act, the debtor doesn’t have to be insolvent for the section to take effect.

For it to be covered by section 423, the transaction must be at an undervalue. This usually means that it is either a gift or a transaction where there is no consideration, or the consideration is significantly less than it should be.

The Court of Appeal noted that dividends are both commercially and legally a return on the investment that the shareholder had made in the company. The shares were a bundle of rights, one of which was the right to receive any dividends declared on the share. The Court took the view that, when a company declared a dividend, it did not receive any consideration for the payment of a dividend. Whilst the payment of a dividend was in no way a gift, it was correct to say that if and when a company pays a dividend to shareholders, its terms don’t provide for the company to receive any consideration in return for the declaration of that dividend.

The Court of Appeal also held that the declaration of a dividend was a “transaction” under section 423. Sequana submitted that a dividend wasn’t a transaction because, in order for there to be a transaction, there needed to be an element of bilateral dealing between two parties. This argument was rejected by the Court which held that the language of section 423 did not preclude its application to the payment of a dividend even it was treated as a unilateral act by a company. However, the Court concluded that, as a dividend is a return on a shareholders’ investment, it was too narrow to say that a dividend was a unilateral act. It was not “merely a disposition of money which results in one party’s money landing up in the bank account of the other without anything said or done by that other”.

In order to fall within section 423, the purpose of the transaction must be to put the assets beyond the reach of a creditor or otherwise prejudice their interests. Clearly, not every dividend payment will have that purpose. In this case, however, the judge made clear findings of fact that the intention was to put assets beyond the reach of creditors.