BTI 2014 LLC v Sequana S.A.

The relative prospect of insolvency at which directors owe a duty to creditors

Corporate insolvency – section 172(3) Companies Act 2006 – risk of insolvency – directors’ duties to creditors – solvency declarations – section 643 Companies Act 2006 – unlawful dividends – transactions to defraud creditors – section 423 Insolvency Act 1986

Sequana had made a provision for the best estimate of a liability of uncertain value. There was a prospect that the actual value of the liability would be enough to render Sequana insolvent. Before the liability was finally quantified (at a higher amount), the directors of Sequana made a solvency declaration under section 643 of the Companies Act 2006 and then both reduced its capital and paid interim dividends. The subsequent determination of the extent of the liability rendered Sequana insolvent. The claimants sought relief against Sequana and its directors for breach of duty, relief under section 423 of the Insolvency Act 1986 and avoidance of an unlawful dividend.

In the course of those trying those claims it became relevant at what point directors owed duties to creditors. Referring to Re HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch) the court held: (a) that the duty did not arise in all cases where the risk of insolvency was more than remote; and (b) that a “real risk that the provision would turn out to be inadequate”, and therefore that the company would transpire to be insolvent, would be “a significant lowering of the threshold”.  As a matter of fact, the court appears to have decided that the risk had been insufficient to constitute a “real risk” if not actually “remote”.

As there had been compliance with the formalities for the declaration of a dividend, as required by Part 23 of the Companies Act 2006, and the accounts had been properly prepared, the dividend was lawful.  However, the payment of a dividend was within the scope of transactions at an undervalue and thus section 423 of the Insolvency Act 1986 applied subject to the requisite intention to put assets beyond the reach of creditors.

The decision suggests that a sufficient risk to engage the duty to creditors is more than simply a “real risk”.  But where is the threshold? The case leaves this unanswered.