When Should Directors Consider The Interests Of Creditors

In the recent decision of BTI 2014 LLC v Sequana SA & others, the High Court considered a number of legal aspects around the payment of dividends and the making by directors of a statement of solvency.

The facts

The facts are long and complicated, but in summary company A owed a debt to company B in that it was obliged to indemnify B in respect of environmental damages, the full liability for which was unascertained. Provision was accordingly made in A's accounts on an estimated basis and over a number of years. A was also owed a debt from company C, its parent.

A subsequently resolved to reduce its capital, and to pay an interim dividend to C by way of set-off against C's intra-group debt to A, with a further interim dividend declared some six months later (also by way of set-off).

A in due course brought proceedings against its directors and against C asserting that:

the dividends were not properly declared under the requirements of the Companies Act 2006 due to defects in the accounts upon which the resolutions were based; the reduction in capital was not properly supported by a solvency statement; and the decision to declare and pay the interim dividends was a breach of the fiduciary duties of the directors to A. B raised a separate claim against both A and C asserting that the interim dividends were transactions entered into at an undervalue in contravention of s.423 of the Insolvency Act 1986.

The court rejected the claims of A, but upheld the separate claim by B.

The decision

In respect of the first claim, it is a fundamental principle that for a company to declare and pay dividends it must have profits available to do so, being the "...accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses..." (s.830(2) of the Companies Act 2006 (CA 2006)). The decision that there are such profits available must be reached by the directors on the basis of relevant accounts which meet certain criteria.

The claimant challenged the payment of the interim dividends on the basis that the company had in fact sustained substantial losses in the relevant period and the accounts relied upon did not give a true and fair view of A's finances, because insufficient provision had been made for the indemnity liability. However, the court found that the provision made was based upon the best estimate of all those involved and the claim was not upheld.

This is linked to the findings...