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 in respect of the second claim, where the court considered the solvency statement made under s.643(1) of the CA 2006 in a reduction of capital and the necessary state of mind of the directors when making the statement that, in their view, there is no ground on which the company could then be found to be unable to pay its debts.

Various tests and standards were considered, but ultimately it was decided that the statutory test of whether a company is solvent is to be applied in a straightforward manner, and not by looking at whether ‘if calamity were to strike on some or all fronts, the company might be unable to pay its debts.’. There is no requirement that there should be objectively reasonable grounds for the statement in order for the statement, or the resulting reduction of capital, to be valid but the directors must be able to show that they actually reached the view expressed in the statement.

In respect of the claim of a breach of fiduciary duty, it was held that such a breach would only have arisen if, declaring the interim dividends, the state of the company was such that the directors should consider the interest of the company’s creditors in addition to those of the shareholders. The mere existence of a long-term liability on the company’s accounts, based upon an estimate and therefore potentially larger than the provision made, would not lead to the directors being bound to consider the creditors’ interest for the entire period of that liability. The court found that at the time the dividends were paid the creditors’ interests duty had not arisen as the company accounts showed no unpaid creditors nor a deficit of assets when compared to liabilities and consequently there was held to be no breach of fiduciary duty.

The final head of claim turned upon insolvency legislation rather than the CA 2006, and it was held for the first time that a dividend can constitute a transaction at an undervalue for the purpose of s.423 of the Insolvency Act 1986 (though not specifically covered by the legislation), and therefore could be subject to challenge. The declaration and payment of the first interim dividend did not appear to have been carried out with the intention of putting assets beyond the reach of potential claimants, but the second interim dividend was found to have been carried out with a view to enabling the sale of the company, by removing the potential risk of the liability under the indemnity turning out to be greater than provided for. This dividend was, therefore, held to be a transaction at an undervalue for the purpose of s.423.


The case highlights a number of interesting questions, not least the point at which directors of a company should begin to consider the interests of its creditors in light of a potential insolvency. It certainly remains the case that directors should continue to exercise as much skill and care as possible in considering any distribution or declaration of solvency, and document fully the decision-making process.

There is also arguably a degree of difficulty in reconciling the decision that there could be a transaction at an undervalue which does not constitute a breach of fiduciary duty and it seems likely that this interaction may be explored further.

For further information please contact Rachael Taylor.