A Dividend Payment Can Constitute a Transaction Defrauding Creditors

February 20, 2019


In light of the decisions made in the case of BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112 (the Sequana case), consideration may need to be given to the interests of creditors when declaring a dividend. The Court of Appeal in the Sequana case concluded that the payment of an otherwise lawful dividend constituted a transaction defrauding creditors under section 423 of the UK’s Insolvency Act 1986 (IA 1986).

Background to the Sequana Case

The creditor in question and the claimant in the Sequana case was B.A.T. Industries PLC (BAT). BAT brought proceedings against Sequana SA (Sequana) and its wholly owned subsidiary, Windward Prospects Limited (Windward).

Following a sequence of corporate acquisitions, BAT had become liable to pay for part of a substantial environmental clean-up operation in the U.S. and Windward was responsible for indemnifying BAT for part of that liability (the Windward indemnity).

In December 2008 and May 2009, the directors of Windward paid dividends to Sequana. The dividends together totaled around €580 million. Both of the dividends were paid following a reduction in Windward’s share capital carried out under section 642 of the UK’s Companies Act 2006 (CA 2006). The directors of Windward signed a solvency statement in relation to the capital reduction declaring that in their opinion Windward was solvent.

At the time that the dividends were paid, Windward had ceased trading and a substantial receivable was owed to it by Sequana. Windward was sold shortly following payment of the May 2009 dividend.

The directors of Windward were named as defendants to BAT’s claim. Their decision to authorise the dividends was challenged by BAT on the following grounds:

  1. The directors had acted in breach of their duties under the CA 2006, including their duty to promote the success of the company (Ground A);
  2. the dividend payments breached Part 23 of the CA 2006, which sets out a number of requirements in relation to the payment of dividends (Ground B); and
  3. they had acted with the intention of defrauding Windward’s creditors contrary to section 423 of IA1986 (Ground C).

The Decisions

Ground A

BAT alleged that the directors of Windward had acted in breach of their statutory duties on the basis that they knew there was a possibility that the liability under the Windward indemnity would exceed the provision made in Windward’s accounts. The court held that the directors of Windward had not acted in breach of such duties. Such a breach could only arise if, at the time of declaring the dividends, the directors were bound to consider the interests of Windward’s creditors. Windward’s balance sheet showed no deficit of liabilities over assets at the time the dividends were paid and there were no unpaid creditors. The court therefore decided that in the circumstances, there was no justification for holding that the directors were bound in such a manner.

Ground B

BAT alleged that the accounts used to justify the dividends: (i) did not enable the directors to make a reasonable judgment as to whether Windward would be able to pay its debts (as is required under the CA 2006 in relation to capital reductions); (ii) made insufficient disclosure about Windward’s exposure under the Windward indemnity; and (iii) made an inadequate provision in relation to the Windward indemnity. The court rejected these claims. It was held that although the directors were required, in relation to the capital reduction, to form an opinion that there was no ground on which Windward could be found to be unable to pay its debts, the absence of reasonable grounds for such an opinion did not render the capital reduction invalid. Furthermore, the provision made in the accounts for contingent liability under the Windward indemnity was the best estimate of all those involved. The accounts gave a true and fair view of the financial affairs of Windward and accordingly, the dividends were not deemed to have contravened Part 23 of the CA 2006.

Ground C

BAT alleged that the dividends constituted transactions entered into at an undervalue for the purpose of placing assets beyond the reach of BAT, Windward’s main creditor. This claim was made against Sequana.

Sequana argued in response to this claim that a dividend paid by a company to its shareholder was incapable of being characterised as a transaction for no consideration or at an undervalue. The court dismissed this submission, holding that section 423 of IA 1986 is “deliberately wide.” Sequana also argued that the directors of Windward did not have the section 423 purpose (i.e., the purpose of placing assets beyond the reach of creditors) in relation to the dividends. The court accepted this submission in relation to the December 2008 dividend but not in relation to the May 2009 dividend. There was evidence to show that the intention of the directors when declaring the May 2009 dividend was to remove from Sequana’s group the risk that the liability under the Windward indemnity might be greater than the assets available to satisfy it. It was held that the purpose of paying the May 2009 dividend by offsetting it against the remaining inter-company receivable (referred to above) was to enable Windward to be sold and to prevent Windward having any legal demand on Sequana to meet BAT’s claims.

Sequana was therefore held to be liable under section 423 of IA 1986.


The judgment made in the Sequana case is interesting in that it addresses some key questions of corporate governance and notably, the duties of directors when declaring dividends. Directors should, before undertaking any capital reduction steps and/or declaring a dividend, assess the financial affairs of the company, the motivation or purpose for which the dividend is paid and implications under UK insolvency laws. Specialist advice should be sought when declaring dividends if there are any concerns regarding the financial health of the company, particularly in circumstances where there is a contingent liability on the balance sheet and the exposure in relation to such liability is difficult to ascertain.