DividendsFollowing our 2016 article, the Court of Appeal has upheld the decision of the High Court that dividends are liable to challenge as transactions defrauding creditors under section 423 of the Insolvency Act 1986 (the “IA”).

The case of BTI 2014 LLC v Sequana S.A. & Others [2019] EWCA Civ 112 should serve as a warning to directors to consider fully the reasoning behind the declaration of dividends to avoid committing an offence.

The Facts

The pertinent facts and case law are summarised in our previous article. Both BTI 2014 LLC and Sequana S.A. appealed the High Court decision and both appeals were rejected. This article focusses on Sequana’s appeal, on which the Court was asked to determine two questions:

1. whether section 423 is capable of applying to the payment of dividends; and if so,

2. whether on the facts of the case the dividend was paid for the purpose of-

a) putting assets beyond the reach of a person who is making, or may at some time make, a claim against the company, or

b) otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.

Is section 423 capable of applying to the payment of dividends?

In order to determine this question, the Court considered the following three points:-

a) Is a dividend a gift?

The Court determined that a dividend is not a gift. In doing so the Court concluded that a share is a bundle of rights (which includes the right to receive dividends) and that dividends are a return on the shareholder’s investment in the company, not a gift.

b) Is a dividend a transaction for no consideration?

The Court held that a dividend is a transaction for no consideration. The payment of a dividend involves the payment of funds beneficially owned by a company to its shareholders and it cannot be said that the company receives consideration for that payment.

c) Was the dividend a “transaction” at all?

It was argued by Sequana that in order for section 423 to apply to a transaction, there is a requirement for a mutual dealing and that the payment of a dividend was not a mutual act.

The Court noted that the definition of “transaction” in the IA was widely drafted (it is an inclusive not exhaustive definition) and that there is nothing in the IA confining section 423 to gifts and bilateral acts. The Court also noted that a dividend is not necessarily a unilateral act (as shareholders often have some control over such decisions) but determined that even if a dividend were a unilateral act, it could constitute a “transaction” for the purposes of section 423.

Was the dividend paid for the purpose of putting assets beyond the reach of creditors or otherwise prejudicing their interests?

The Court’s view was that this a matter of the subjective intention of the person declaring the dividend and is essentially a question of fact. Richards LJ quoted the test set out by Arden LJ in IRC v Hashmi [2002] EWCA Civ 981 in concluding that it does not have to be the sole or dominant purpose, but that it is sufficient if it “can properly be described as a purpose and not merely as a consequence, rather than something which was indeed positively intended”.

Richards LJ stated that the High Court Judge made clear findings as to the purpose of the payment of the dividend, (namely to eliminate a liability of Sequana for clean-up costs) and that its purpose fell within section 423.


A section 423 claim can be brought outside of insolvency proceedings by any “victim” of the transaction. This case opens the door for a wide class of claimants to challenge the otherwise lawful payment of a dividend as a transaction defrauding creditors.

Whilst this decision may cause some directors and shareholders sleepless nights, it should be noted that the Court did not find that the directors owed any duty to a company’s creditors when paying otherwise lawful dividends (this formed the basis of BTI’s rejected appeal). However this case underlines the importance of directors seeking professional advice when declaring dividends, particularly in circumstances where a company has provisions in its accounts for historic or prospective debts, to ensure that they do not fall foul of section 423.

It has been reported that Sequana intends to seek permission to appeal to the Supreme Court, so whether this position changes, remains to be seen.