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Directors’ Duties After The Sequana Case

A recent case has confirmed that rules providing liquidators with a mechanism to reverse certain transactions made during the period of a company’s insolvency (in this case, s.423 of the Insolvency Act 1986) could apply to the payment of, otherwise lawful, dividends to shareholders.

The case also confirmed that the duty owed by directors to consider the interests of creditors can apply even if a company’s circumstances fall short of insolvency.

The case is BTI 2014 LLC v Sequana SA & others [2019] EWCA Civ 112.

What the court held

S.423 applies to (amongst other things) a “transaction” comprising a “gift” or which does not otherwise provide for any “consideration” (i.e. nothing is provided in return). The court found that a dividend was not a gift because shareholders were entitled to dividends under the terms of the articles of association. The real issue was whether or not, when paying the dividend, the company parted with property and received nothing in return. The court held that this was the case as the company received no consideration in the required sense. The last stumbling block was the requirement under the legislation for a “transaction”. The court held that the definition of “transaction” was inclusive and, although a transaction usually required a bilateral activity, this did not exclude unilateral action, i.e. a gift (which is, after all, specifically provided for under s.423).

The Court also held that the duty of directors to have regard to the interests of creditors arises when the directors know or should know that the company is or is likely to become insolvent accurately encapsulated the trigger. In this context, “likely” means probable.

Learning points

Directors will need to be mindful of the purpose for which they are paying dividends, in particular whether the purpose falls within section 423(3), including putting assets beyond the reach of a person who is making, or may make, a claim against the company or of otherwise prejudicing the interests of such a person in relation to a claim.

So far as the creditors’ interest duty is concerned, it was accepted by the parties and (seemingly) by the court, that there is a single threshold for when the duty arises, applicable to all decisions taken by directors. This is a useful clarification but what must be taken into account by directors at that point and whether creditors interests are paramount or are to be considered without being decisive, is still uncertain.

Further appeal?

There may well be. Sequana announced that it intends to seek permission to appeal to the Supreme Court, so watch this space.

If you would like advice or assistance on any of the issues raised in this blog please contact Catherine Fisher, Head of Dispute Resolution. 


Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.

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