Company Law: BTI 2014 LLC and BAT INDUSTRIES PLC V SEQUANA SA 2016.
In the case, dividend payments were made by a subsidiary company to its parent company based on incorrect amounts. It was to the Court to determine whether this was in breach of the directors’ fiduciary duties to the company or were transactions defrauding the creditors. In addition, the decision to reduce the company’s share capital was also challenged.
Reduction of share capital
Section 642 Companies Act 2006 sets out the instances where a solvency statement must be made to support a reduction in capital.
A solvency statement is a statement written by all directors outlining the company’s situation at the time of writing. It includes the following:
- That no grounds exist indicating that the company would not be able to pay or discharge its debts and:
- Immediately following the statement, the company will be able to pay its debts as and when they are due up to the 12 months following the statement. In the event that a company intends to wind up within the 12 months, the statement will outline that the company will be able to pay or discharge its debts within 12 months of the commencement of winding up.
In forming their opinions, directors must take into account all of the company’s liabilities, including any contingent or prospective liabilities. If they make a solvency statement without reasonable grounds for the opinions expressed, a criminal offence has been committed. This offence is punishable by 12 months’ imprisonment, a fine or both.
Contingent or prospective liabilities
The test to be applied when considering contingent or prospective liabilities is to ask:
“whether the company is deemed to be insolvent because the amount of its liabilities exceeds the value of its assets. This will involve consideration of the relevant facts of the case, including when the prospective liability falls due, whether it is payable in sterling or some other currency, what assets will be able to meet it and what if any provision is made for the allocation of losses in relation to those assets.”
Duty over creditors’ interest
The test to be applied when consideration of this issue is, if at the time of the payment of the dividend, whether the duty to act in the best interest of the creditors, as perceived by the directors, had arisen.
There are several factors to take into consideration. These include whether the balance sheet shows a deficit of liabilities over assets; whether there are unpaid creditors chasing the company for payment, falling income and accumulating trading losses.
In High Court, Mrs Justice Rose held that, as the company was not on the verge of insolvency or doubtful insolvency, nor in a precarious financial state, an actionable breach could not be found.
Moreover, it was also held that the fact that the estimate could be incorrect and that the company finds itself with insufficient means to pay at some point in the future, is actually a problem many companies face that have contingent liability provisions in their accounts.
Creditors be careful! Remember to consider your debtor companies filed accounts and history to see if there are any apparent insolvency measures. These could be used to challenge any activities and consider the actions of the directors.
Please note that the above does not in any way constitute as legal advice. For further information and advice, please contact Nath Solicitors.