The court offers guidance on reversing lawful dividend payments and when directors need to take into account creditors’ interests.

By Simon J. Baskerville, Daniel Smith, Anna Hyde, Lisa Stevens, and Vanessa Morrison

On 6 February 2019, the UK Court of Appeal published a judgment in BTI v. Sequana that will impact both creditors and directors of English companies.

The court decided that the payment of a dividend — despite its lawfulness under the Companies Act 2006 — can fall within the scope of section 423 of the Insolvency Act 1986, opening the payment up for challenge by a disgruntled creditor even outside of the realm of insolvency. When deciding to make a dividend payment, directors therefore ought to consider carefully not just the corporate statutory regime but also the Insolvency Act 1986 and common-law directors’ duties.

Furthermore, the ruling provides much-needed clarity on how close to insolvency a company needs to be before directors must consider creditors’ interests when fulfilling their duty to promote the success of the company, indicating the trigger of a so-called “duty shift”.

For an analysis of these rulings, see Client Alerts UK Court of Appeal: Creditors Can Seek to Reverse Lawful Dividend Payments and UK Court of Appeal: When to Trigger the Creditor Duty Shift.