How are debts owed to family members dealt with in divorce proceedings?
The first question for the court to determine is whether the debts are legitimate, and this is a...
A dividend which is lawful under company law might nevertheless fall foul of insolvency legislation if its purpose is to put assets beyond the reach of creditors.
According to a corporate lawyer, “A company which intends to declare a dividend must have distributable profits available to make the distribution,” says Philip Round, a partner in the corporate team at George Green LLP. “According to a recent High Court decision, the first to consider this point in the context of distributions, a dividend can still be challenged, even if the company had sufficient reserves at the time it was declared, if the directors’ intention was to defraud creditors”.
Mr Round continues, “in the case of BTI 2014 LLC v Sequana SA and others, the share capital of a company was reduced using the solvency statement procedure in order to create sufficient distributable reserves to enable the company to declare a dividend. The dividend was then set off against a significant inter-company debt due from the parent. This was done at a time when the company had a contingent liability to contribute to an environmental clean-up operation.” According to Mr Round, the directors’ compliance with their fiduciary duties to the company was subsequently challenged. “The adequacy of reserves was disputed in light of the contingent liability, and it was also alleged that the risk of insolvency was sufficiently serious to require the directors to act in the interests of the company’s creditors. The court, however, ultimately decided that at the time the dividend was declared, the financial situation of the company was insufficiently precarious to oblige the directors to give priority to the interests of creditors, and that the directors were not required to deduct the full amount of the contingent liability in determining the level of reserves. It nevertheless concluded that it was clear from the actions of the directors that the purpose of the dividend was to remove the risk of the parent being required to contribute to the potentially significant environmental claim. The dividend was therefore successfully challenged as a transaction defrauding creditors.”
Mr Round concludes, “a transaction defrauding creditors is a transaction at undervalue made with the purpose of putting a company’s assets beyond the reach of a potential claimant. The company need not be insolvent at the time of the transaction in order for it to be caught by the legislation. This is the first case to determine that an otherwise lawful dividend can constitute an undervalue transaction for this purpose, and demonstrates that directors cannot rely on the sufficiency of reserves as a defence to a claim under the relevant insolvency legislation, if there was a clear intention to defraud creditors. Advice from insolvency professional should always be sought if directors are unsure whether their actions are likely to be challenged.”