For IP’s seeking to challenge a dividend… you’d usually check whether:
- the directors had complied with company’s constitution and Part 26 Companies Act 1985 requirements?
- The accounts represented a true and fair view (no big liabilities left off!)?
- There was a material change between declaration of dividend and payment of dividend?
- The dividend was paid less than 6 years before?
If a case fell outside those guidelines, you might stop there. But a recent case has extended the scope of a claim. Whether a dividend could be a transaction at an undervalue, or even a transaction, has kept academics perplexed for quite some time – but this is the first time (as far as we are aware) that a Judge has held that it could.
The dispute in this case is likely to be worth in the hundreds of millions, so it was probably worth a second look! Here we had a non-trading subsidiary sitting on a very large intercompany loan receivable but facing known environmental claims which had yet to be quantified. The directors made a provision for the liability in their accounts, based on the likely level of damages the company would ultimately have to pay. The directors received professional advice in assessing the provision. Crucially, the Court did not criticise this calculation, so the dividend could not be challenged as unlawful based on the usual lack of distributable reserves. It also found the company wasn’t insolvent. The directors admitted they wanted to absolve the company’s parent of any potential liability in relation to the environmental claims. They declared two large dividends, which were offset against the intercompany receivable (from the parent), leaving just the balance of the asset to pay the environmental liability. Although the details are not in the report of the decision, we must assume the environmental liability turned out to be greater than the provision made in the accounts, leaving a creditor short – hence the claim. There was no criticism of the directors, on the contrary the Judge acknowledged they were men of standing and considerable expertise.
The Court accepted that the dividend could be challenged on the basis it was a transaction at an undervalue with the purpose of putting the assets beyond the reach of creditors (under section 423 of the Insolvency Act (transaction defrauding creditors)). Under this section there is no requirement:
- of insolvency;
- that the aim to remove assets from creditors is the ‘main purpose’; and
- that the directors were fraudulent or in breach of their duties.
In addition, under this section, the Court’s scope to make an order is not limited to restoring the position to what it would have been had the transaction not been entered into. It’s much wider – it may make any order protecting the persons who are victims of the transaction (here a creditor in respect of the environmental claims).
Given the amounts involved, this is not likely to be the last word on the subject. But as things stand – dividends could be transactions at an undervalue for either section 423 or section 238 Insolvency Act. That’s helpful for IPs as it increases the potential for recoveries into the estate where the usual challenge against a dividend does not work. This might be because the accounting treatment was beyond reproach, as in this case, or if limitation for the companies act claim had expired, or because the remedy of paying back the dividend doesn’t adequately compensate whoever lost out.
On the other hand, where does this decision leave directors when a company faces a contingent liability that cannot be accurately quantified? Ironically, had the company gone into voluntary liquidation, the parent might well have been better off – the Courts have held that the liquidator must place a present value on any contingent claim and not provide for the maximum potential payment once the liability crystallises, even if the company is solvent and the creditor may well lose out. More work for IPs…
  EWHC 1686 (Ch) BTI 2014 LLC v Seguana S.A. Chancery Division, 11 July 2016
 The Court specifically commented that there is no suggestion that there needs to be any fraud for this section to bite.
 6 years from the date of the dividend, rather than 6 years from the start of the formal insolvency proceedings for s238.
 Ricoh Europe Holdings BV and others v Spratt and another  EWCA Civ 92