Factual and Procedural Background
The appeal concerns two principal issues arising from claims related to two dividends paid by Company A, a wholly-owned subsidiary, to its parent, Company B. The first dividend of 443 million was paid in December 2008 and the second of 135 million in May 2009. The claims challenged these dividends on three bases: (i) that they were not lawfully paid under Part 23 of the Companies Act 2006 ("could not pay" claims), (ii) that the directors breached their duty to consider creditors' interests ("should not pay" claims), and (iii) that the payments fell within section 423 of the Insolvency Act 1986.
The "could not pay" and "should not pay" claims were brought against the directors authorising the payments and against Company B as a constructive trustee. The original claimant, Company A, assigned the claims to a corporate vehicle (BTI), which pursued them. Company B brought its own claim under section 423 as a potential creditor ("victim").
The trial judge dismissed all claims relating to the December dividend, and no appeal was brought against that part. For the May dividend, the judge dismissed the "could not pay" and "should not pay" claims but found against Company B under section 423. Company B appeals the section 423 judgment, and BTI appeals the dismissal of the "should not pay" claim.
At the time of the dividends, Company A had ceased trading and had contingent indemnity liabilities related to environmental pollution claims in the United States. Its assets included an investment contract capped at $250 million, historic insurance policies expected to yield $100 million subject to litigation, and an inter-company debt owed by Company B to Company A of about 585 million. The dividends were paid by set-off against this inter-company debt, reducing it substantially.
The directors prepared accounts estimating provisions for contingent liabilities in compliance with statutory and accounting standards. The judge found the accounts and provisions properly prepared and the dividends lawfully paid.
Legal Issues Presented
- Whether section 423 of the Insolvency Act 1986 applies to the payment of otherwise lawful dividends, including whether such dividends can constitute a "transaction at an undervalue" and whether the payment was made with the requisite statutory purpose.
- The circumstances and timing of the directors' duty to have regard to the interests of creditors, specifically whether this duty arises when directors consider the payment of an otherwise lawful dividend.
Arguments of the Parties
Appellant's Arguments (Company B)
- A dividend is not a "transaction at an undervalue" within section 423(1) of the Insolvency Act 1986.
- The May dividend was not paid with the purpose of putting assets beyond the reach of creditors or otherwise prejudicing their interests as required by section 423(3).
- Dividends are returns on shareholders' investments and thus cannot be characterized as gifts or transactions providing no consideration.
- Section 423 should not apply to dividends because the statutory regime in Part 23 of the Companies Act 2006 and directors' fiduciary duties already protect creditors.
- The judge conflated the purpose of Company B with that of Company A and the purpose of the sale of Company A with the purpose of paying the May dividend.
- The remedy ordered was excessive and should be limited to the maximum liability of Company A under a subsequent Funding Agreement.
- The interest rate and currency conversion date applied in the remedy were incorrect.
Appellee's Arguments (BTI)
- The payment of the May dividend fell within section 423 as a transaction at an undervalue entered into with the purpose of putting assets beyond the reach of creditors.
- Directors owe a duty to consider creditors' interests where there is a real, as opposed to a remote, risk to creditors, which arose in relation to the May dividend.
- The statutory duty under section 172(3) of the Companies Act 2006 incorporates the common law duty to consider creditors' interests in certain circumstances.
- The payment of the May dividend breached directors' duties, notwithstanding compliance with Part 23 and accounting provisions.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Trevor v Whitworth (1887) 12 App Cas 409 |
Common law rule prohibiting distribution of dividends out of capital. |
Confirmed continued relevance alongside statutory provisions governing dividends. |
| Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 |
Application of common law rule on dividends paid out of capital. |
Supported the statutory regime; claimants accepted no additional common law breach beyond Part 23. |
| Inland Revenue Commissioners v Laird Group plc [2003] UKHL 54 |
Characterisation of dividends for tax purposes and nature of transactions. |
Distinguished by the court as not directly applicable to section 423; dividend payments give effect to shareholder rights but are not transactions for consideration. |
| Clarkson v Clarkson [1994] BCC 921 |
Definition of "transaction at an undervalue" and unilateral acts under insolvency law. |
Discussed but not endorsed; court rejected argument that certain unilateral acts fall outside section 423. |
| IRC v Hashmi [2002] EWCA Civ 981 |
Interpretation of "purpose" under section 423(3) as subjective intention. |
Applied to find that the impugned transaction need only have the prohibited purpose as one of its purposes. |
| Re Taylor Sinclair (Capital) Ltd [2001] 2 BCLC 176 |
Requirement of bilateral dealing for section 423 transactions. |
Considered in analysis of whether dividend payments constitute transactions. |
| Re Simon Carves Ltd [2013] EWHC 685 (Ch), [2013] 2 BCLC 100 |
Bilateral nature of transactions under section 423. |
Supported the view that mere unilateral payment without dealing may not qualify as a transaction. |
| Re Hampton Capital Ltd [2015] EWHC 1905 (Ch), [2016] 1 BCLC 374 |
Requirement of engagement or communication between parties for section 423 transactions. |
Considered in the context of dividend payments and whether they are transactions. |
| West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 |
Directors’ duty to consider creditors’ interests arises when company is insolvent. |
Affirmed that shareholders cannot ratify breaches of duty harming creditors in insolvency. |
| Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 |
Creditors’ interests duty arises in insolvency context; directors must consider creditors when company is insolvent or near insolvency. |
Adopted as key rationale for creditors’ interests duty in insolvency or near insolvency. |
| Official Receiver v Stern [2001] EWCA Civ 1787, [2002] 1 BCLC 119 |
Shareholders cannot waive directors’ duty to creditors in insolvency. |
Reinforced the duty owed by directors to creditors when company is insolvent. |
| Bilta (UK) Ltd v Nazir [2014] EWCA Civ 968, [2014] Ch 52; [2015] UKSC 23 |
Recognition that directors’ duty to consider creditors arises when company is or likely to become insolvent. |
Confirmed the common law duty preserved by section 172(3) and its application in insolvency context. |
| Brady v Brady [1988] BCLC 20 |
Directors’ duty to consider creditors’ interests varies with solvency status of company. |
Discussed but with some passages disapproved; consistent with insolvency-based trigger for duty. |
| Grove v Flavel (1986) 11 ACLR 161 |
Director acts improperly if acting to protect self or related companies when company faces real risk of liquidation. |
Considered in submissions regarding directors’ duties and improper use of information. |
| Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191 |
Directors must consider creditors’ interests if there is a real and not remote risk of insolvency. |
Referenced in support of BTI’s argument but noted that companies were insolvent in that case. |
| Vivendi SA v Richards [2013] EWHC 3006 (Ch) |
Creditors’ interests duty arises when company is insolvent or near insolvency. |
Applied and cited Australian authorities supporting insolvency or near insolvency trigger. |
| 4Eng Ltd v Harper [2009] EWHC 2633 (Ch) |
Section 423 as providing restorative remedies to protect victims of undervalue transactions. |
Considered in relation to the appropriate remedy for the May dividend transaction. |
Court's Reasoning and Analysis
The court first addressed whether section 423 of the Insolvency Act 1986 applies to the payment of dividends. It rejected the submission that dividends are gifts, holding instead that dividends are returns on shareholders’ investments and thus not gifts. The court further held that dividends are transactions within the meaning of section 423, even if unilateral, because the statutory definition of "transaction" is inclusive and does not require bilateral engagement in all cases. The court found no reason to exclude dividends from section 423’s scope, noting that the statutory creditor protection regime under the Companies Act 2006 does not displace section 423.
On the statutory purpose under section 423(3), the court found that the May dividend was paid with the purpose of putting assets beyond the reach of a potential creditor (Company B), thereby prejudicing its interests. The court rejected Company B’s argument that the judge conflated the purposes of Company A and Company B and the purposes of the dividend payment and the sale of Company A. The judge had made clear findings that Company A’s purpose in paying the dividend was to eliminate the inter-company debt and thus remove the risk that Company B would be liable for Company A’s indemnity liabilities.
Regarding remedies, the court upheld the judge’s discretion to order Company B to pay sums up to the amount of the May dividend plus interest to the claimant, rejecting the submission that the remedy should be limited to the liabilities under the Funding Agreement. The court also considered the interest rate and currency conversion issues, allowing Company B’s appeal on the interest rate start date but dismissing the cross-appeal on the currency conversion date.
On the directors’ duty to consider creditors’ interests, the court reviewed extensive authorities and concluded that the duty arises when the company is insolvent or near insolvency, not at a lower threshold such as a real (rather than remote) risk of insolvency. It held that Company A was not insolvent or near insolvency at the time of the May dividend and that the risk of its indemnity liabilities exceeding assets was insufficient to trigger the duty. The court rejected the argument that the duty does not apply to dividend payments, finding that the statutory regime does not occupy the whole field.
The court also dismissed the claim that the directors breached their duties under sections 171 (proper purpose) and 174 (care, skill, and diligence) of the Companies Act 2006, noting that the claim under section 171 was not pursued at trial and that any breach could have been ratified by shareholders. The claim under section 174 failed given compliance with statutory requirements and shareholder consent.
Holding and Implications
The court DISMISSED ALL APPEALS AND CROSS-APPEALS except for Company B’s cross-appeal regarding the interest rate start date in the section 423 claim, which was allowed.
The direct effect is that the judgment below stands: the May dividend payment is set aside under section 423, with Company B ordered to pay sums to the claimant up to the dividend amount plus interest, reflecting the harm to creditors. The directors of Company A did not breach their duties in relation to the payment of the May dividend, and the statutory regime governing dividends remains the primary protection for creditors in that context.
No new precedent was established beyond clarifying the application of section 423 to dividends and affirming the existing threshold for the directors’ duty to consider creditors’ interests.