Summary

A common law duty to have regard to creditors' interests could be triggered when a company's circumstances fell short of actual insolvency. Such a duty arose when the directors knew or should have known that the company was or was likely to become insolvent. In that context, "likely" meant probable.

Facts

The appellant (BTI) challenged a decision that a dividend paid by its predecessor (AWA) to its parent company (S) had not been paid in breach of the duty to have regard to the interests of its creditors. S cross-appealed against a decision that the dividend fell within the Insolvency Act 1986 s.423.

BTI was a corporate vehicle set up by the first respondent in S's appeal (BAT). The dividend was paid at a time when AWA had ceased to trade and had contingent indemnity liabilities in respect of foreign claims. AWA's assets included an inter-company debt owed to it by S. The dividend payment was made by way of set-off against S's debt. BTI replaced AWA as claimant. BTI brought the breach of duty claim against its directors who authorised the dividend payment and against S as constructive trustee. BAT brought the s.423 claim in its capacity as a potential creditor of BTI. The judge found that the dividend had been paid in compliance with the Companies Act 2006 Pt 23. Dismissing the breach of duty claim, she held that AWA's risk of insolvency at the time the dividend was paid was not such as to trigger the common law duty to have regard to the interests of creditors. Judgment was given against S under s.423 and it was ordered to pay sums to BTI up to the amount of the dividend.

BAT submitted that a dividend constituted a gift, since a shareholder ordinarily had no right to the payment of dividends; if not, it was either a transaction for no consideration or, in any event, involved a "transaction" within the meaning of s.423(1). S submitted that the appropriate remedy under s.423 was to restore its debt that was eliminated by the set-off.

Held

Section 423: transaction at undervalue - There was no reason to think that Parliament intended the word "gift" in s.423(1)(a) to carry anything other than its usual meaning. Dividends were both commercially and legally a return on an investment. The payment of a dividend involved the payment of funds beneficially owned by a company to its shareholders, who received them pursuant to rights conferred by the terms of share issue or by the articles of association. Those rights were attached to the shares, for which consideration had been provided. A dividend was capable of coming within the definition of "transaction" even if it was a gift, agreement or arrangement; the inclusion of "gift" did not provide an exception to the definition. The language of s.423(1) did not preclude its application to the payment of a dividend, Greenberg v Inland Revenue Commissioners [1972] A.C. 109 and Clarkson v Clarkson (A Bankrupt) [1994] 4 WLUK 194 considered. There was no justification for reading s.423 as qualified by Pt 23 of the 2006 Act, nor any conceptual difficulty in an otherwise lawful dividend being paid for the purpose of putting assets beyond the reach of claimants. Therefore, the payment of a dividend was within the scope of s.423(1) even if it could not be said to involve an agreement or arrangement between the company and the shareholders (see paras 41, 50, 58, 60-64 of judgment).

Section 423: statutory purpose and conclusion - A transaction was subject to s.423 only if the requirements of s.423(3) were satisfied, namely that the transaction was entered into with the object of putting assets beyond the reach of potential claimants or of otherwise prejudicing their interests. The judge had clearly found that the dividend was paid by way of set-off against S's debt and that its purpose fell within s.423, namely to eliminate the risk that S would be responsible for AWA's liabilities. S's appeal was therefore unsustainable (paras 65, 74).

Section 423: remedies - It was for the judge to fashion the remedy that she considered, in her discretion, would best restore the position to what it would have been if the dividend had not been paid and best protect the interests of the victims. Given her unchallenged findings and the inherent uncertainties in ascertaining whether AWA's liability would have been different but for the dividend payment, it was not possible to say that her order was unreasonable or contrary to principle (paras 88-89).

Breach of duty - The insolvency legislation provided for setting aside transactions which prejudiced creditors and for restricting the payment of dividends; however, it was also recognised at common law that consideration of creditors' interests could be an element in the duties of directors, Liquidator of West Mercia Safetywear Ltd v Dodd [1987] 11 WLUK 231 followed. Reconciling the duty to promote the success of the company under s.172(1) of the 2006 Act with the creditors' interest duty was likely to present difficulties. In particular, the wording of s.172(3) implicitly recognised that it was difficult to identify when that duty was triggered. The authorities suggested four possibilities: when the company was actually insolvent; when it was on the verge of insolvency; when it was likely to become insolvent; or when there was a real, as opposed to a remote, risk of insolvency. Those descriptions were too vague to serve as a useful test for the important step of engaging the creditors' interests duty. Although it would not be appropriate for the court to introduce such a test as a development of the common law, the authorities indicated that the duty might be triggered when a company's circumstances fell short of actual, established insolvency. Since directors might not know, nor be expected to know, that the company was actually insolvent until some time after it had occurred, a test falling short of established insolvency was justified. On the authorities, the creditors' interests duty arose when the directors knew or should have known that the company was or was likely to become insolvent. In that context, "likely" meant probable, Bilta (UK) Ltd (In Liquidation) v Nazir [2013] EWCA Civ 968followed. Since there was no justification for a finding that AWA was insolvent or likely to become so at the date of the dividend payment, the judge had been entitled to dismiss BTI's claim based on a breach of s.172(3) (paras 128-129, 199, 202, 213, 215-221, 228-229).

Appeal dismissed, cross-appeal dismissed