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England and Wales Court of Appeal (Civil Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> BTI 2014 LLC v Sequana S.A. & Ors [2019] EWCA Civ 112 (06 February 2019) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2019/112.html Cite as: [2019] 1 BCLC 347, [2019] Bus LR 2178, [2019] WLR(D) 68, [2019] EWCA Civ 112, [2019] BCC 631, [2019] 2 All ER 784, [2019] BPIR 562, [2019] 2 All ER (Comm) 13 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MRS JUSTICE ROSE
HC-2014-001215
HC-2013-00376
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE DAVID RICHARDS
and
LORD JUSTICE HENDERSON
____________________
BTI 2014 LLC |
Appellant |
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- and - |
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(1) SEQUANA S.A. (2) ANTOINE COURTEAULT (3) PIERRE MARTINET (4) CLIVE MOUNTFORD (5) MARTIN NEWELL (6) SELARL C. BASSE |
Respondents |
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And between: |
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SEQUANA S.A. |
Appellant |
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-and- |
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(1) BAT INDUSTRIES PLC (2) WINDWARD PROSPECTS LIMITED (3) SELARL C. BASSE |
Respondents |
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Laurence Rabinowitz QC, David Mumford QC, James Kinman and Niranjan Venkatesan (instructed by Skadden, Arps, Slate, Meagher & Flom (UK) LLP) for Sequana S.A. and for Messrs Courteault, Martinet, Mountford and Newell
Selarl C. Basse did not appear and was not represented
Hearing dates: 5-8, 11 June 2018
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Crown Copyright ©
Lord Justice David Richards:
Introduction
Facts
The law governing the payment of dividends
"References to provisions for liabilities or charges are to any amount retained as reasonably necessary for the purposes of providing for any liability or loss which is either likely to be incurred, or certain to be incurred but uncertain as to amount or as to the date on which it will arise."
Section 423 Insolvency Act 1986: introduction
"(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if-
(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;
(b) he enters into a transaction with the other in consideration of marriage or the formation of a civil partnership; or
(c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself.
Section 423: is a dividend "a transaction at an undervalue"?
Section 423: is a dividend a gift?
Section 423: is a dividend a transaction for no consideration?
"In construing section 423 I accept Mr Thompson's submission that the wording of section 423 is deliberately wide in order to protect creditors from assets being moved from the potential debtor out of their reach. Subsection (1) is drafted to exclude transactions only where the consideration received by the potential debtor is not significantly less in value than the consideration that the debtor receives. Where the consideration provided by the debtor and the other party to the transaction are roughly the same, there can be no detriment to the creditor because the debtor's assets are not depleted. But where they are not, then the creditor is less likely to be able to recover what is owed to him. There may be a situation where the consideration paid by the debtor to the third party is fixed in a contract but payment is delayed. Provided that the initial contract was not entered into with the s 423 purpose, that delayed payment is not a transaction with the s 423 purpose because the purpose is to fulfil the contractual obligation to make payment. The payment may have the consequence of depriving other creditors of money later, but as Arden LJ emphasised in Hashmi, consequences are different from purposes. The payment of the dividend is not, in my judgment, the satisfaction of an earlier obligation in the same way. It is true that the reason why the member of the company, rather than any other person, receives the dividend is because of the pre-existing relationship of company and shareholder. But the decision to pay the dividend and choice of its value is not the consequence of that relationship because it is discretionary not only in its amount but in whether it is paid at all."
"First, the only possible claimant in respect of those other causes of action is the company itself whereas the class of claimants here is much wider under section 424. Secondly, the powers of the court to put matters right under sections 423(2) and 425 are much broader and more flexible than the remedies available under Part 23. It is not difficult to see that a blanket exclusion of dividend payments from the scope of section 423 will quickly reduce the efficacy of the provision given the many instances where the directors and shareholders of a company are the same or linked individuals."
"(i) why is the payment of the undistributed profits of the company to the shareholders in the course of a liquidation not a transaction relating to their shares? and (ii) what if any is the difference between the payment of the undistributed profits to the shareholders in the course of a liquidation and their distribution to shareholders by way of dividend while the company is a going concern? In both cases the payment to each shareholder is made in respect of his shares."
"Once realised the assets of a company in liquidation are a distributable fund in the hands of the liquidator, who no longer needs funds with which to carry on its undertaking. After the creditors have been paid and the amounts credited as paid up on the shares have been repaid, the balance is distributable to the ordinary shareholders because it belongs to them, subject only to the liquidator's discretion to retain sufficient funds in his hands to enable him to complete the winding up. The distribution of the undistributed profits of a company in liquidation to its shareholders is not a transaction relating to securities because neither the shares themselves nor the rights attached to them are affected by a payment which merely gives effect to the shareholders' rights; they receive only what is already theirs. Distributions are made to shareholders in respect of the shares, but the shares of the individual shareholder are nothing more than the measure of the proportion of the total which is due to him."
"Whether the company is in liquidation or continuing to carry on business as a going concern, therefore, the distribution of the undistributed profits of a company to the shareholders entitled thereto merely gives effect to the rights attached to the shares. The funds are released, in the one case from the liquidator's discretion to retain them for the purpose of the winding up, and in the other from the directors' discretion to retain them for the purposes of the undertaking. Given that the former is not "a transaction relating to securities", neither in my opinion is the latter. The relationship between the payment and the shares in respect of which it is paid is the same in both cases."
Section 423: was the May dividend a "transaction"?
"I thought at one time that some inference could be drawn from the word 'otherwise', but in view of the extended definition of transaction to include a gift I do not think that any necessary inference can be drawn from the word 'otherwise', because gift is included in the definition section of the Insolvency Act. So no emphasis can be placed on 'otherwise', which is correctly there in any event."
"The second part of this definition does not easily fit into the circumstances of the appointment to Mrs Clarkson. True, she gave no consideration, but this was not because of the terms of the transaction as that phrase might be ordinarily understood. The appointment in her favour was unilateral and unconditional. If it was a transaction it contained no terms as to consideration at all. It would be more natural to say that Mrs Clarkson received a gift. The real question is, from whom did she receive the gift?"
Section 423: the statutory purpose
"In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose-
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make."
"There is, in contrast, plenty of evidence to show that the intention of AWA, through the governing minds of Mr Martinet and Mr Courteault, in declaring the May Dividend was to remove from the Sequana group the risk that the indemnity liability to BAT for the Lower Fox River clean up might turn out to be much more than the amount available from the Maris Policy plus the Historic Insurance Policies receipts."
"511. There may well have been legitimate business reasons for Sequana wishing to rid itself of the risk that the Maris Policy and the Historic Insurance Policies would ultimately not be enough to enable AWA to fulfil its indemnity obligations. But there is no requirement in section 423 for the transferor to be motivated by some ill will towards a particular creditor or to be acting dishonestly (although many of the cases in which section 423 is relied on are cases of dishonesty). The removal of the 'scary' item on Sequana's balance sheet could only be achieved if the May Dividend could be paid by off-setting it against the remaining inter-company receivable so that the company could be sold. That was the purpose of the transaction.
512. Mr Foxton argued that the purpose of the sale of AWA might have been to remove the liability from Sequana's account but the transaction being challenged here under section 423 is not the sale as such but the payment of the dividend. Further, he submitted, there is no evidence that the dividend payment was motivated by the desire to remove any risk of further liability from Sequana. I do not accept that one can distinguish between the purpose of paying the dividend and the purpose of selling the company in that way by the time the May Dividend came to be paid. Both Mr Martinet and Mr Courteault knew what the sequence of events would be on the evening of 18 May 2009 during the series of board meetings that they held over the telephone. It is clear from Hill v Spread Trustee referred to earlier that it is enough if the impugned transaction is entered into with the s 423 purpose; it does not have to achieve that purpose by itself:
"102. … If the transaction is entered into with the requisite purpose, the fact that some other event needs to occur does not mean that the transaction cannot itself be within section 423(3). I consider that this is what the judge meant by his test of whether the transaction was an essential part of the purpose. … The right approach in my judgment is to apply the statutory wording. It is enough if the transaction sought to be impugned was entered into with the requisite purpose. It is entry into the transaction, not the transaction itself, which has to have the necessary purpose."
513. I have no doubt here that the payment of the May Dividend was entered into with the purpose of eliminating the receivable which then cleared the way to AWA being sold and to Sequana removing any risk of having to fund the indemnity itself if the funds left in AWA proved to be inadequate."
"The Claimants rely on the very particular circumstances of this case. AWA was a non-trading company and a wholly owned subsidiary. Its only function was as a containment vehicle for the Fox River liability. There is clear evidence that the purpose of the declaration of the May Dividend and the sale of AWA to TMW clearly was to remove from Sequana the risk that the Maris Policy plus the insurance proceeds might not be enough to meet the indemnity. Such evidence of the subjective intention of those in control of the company when making the decision to pay the dividend will distinguish this case from other cases where directors declare dividends for their shareholders for the usual reasons for which dividends are paid, without turning their minds to whether this leaves enough money for potential creditors. Here there is no doubt that the subjective intention of the directors at the time of the May Dividend and the sale was to prevent AWA having any legal or moral call upon its parent company to meet its creditors' claims. After the declaration of the dividend and the sale to TMW, the creditors were prejudiced because the assets of AWA had been depleted and it no longer had any call on Sequana to that extent."
"518. … AWA received advice and, as I have held, properly took the view that the best estimate of its liability under the indemnity was $143 million, covered by the Maris Policy. But Mr Martinet and Mr Courteault were well aware of the great uncertainties that existed over the ultimate level of remediation and NRD [natural resources damages] costs. The size of NCR/API's share would be determined perhaps only after many years of the further litigation. It may have been an unlikely scenario and I have held that it was not sufficiently likely to generate a duty to take account of BAT's interests when declaring the May Dividend. But the evidence shows that it was precisely the scenario they had in mind when they paid the May Dividend in order then to be able to sell the company and move the risk out of the group. The transaction was undertaken with the intention of putting assets beyond the reach of BAT in the event that the Maris Policy and the Historic Insurance Policies receipts were not enough to meet the indemnity claim. This prejudiced BAT because, as Mr Martinet and Mr Courteault knew, the new owners of AWA would not have any other funds to make good any shortfall.
519. I therefore find that AWA, through its directors, did have the s 423 purpose when paying the May Dividend."
"Here there is no doubt that the subjective intention of the directors at the time of the May Dividend and the sale was to prevent claims. After the declaration of the dividend and the sale to TMW, the creditors were prejudiced because the assets of AWA had been depleted and it no longer had any call on Sequana to that extent."
Section 423: remedies
"I do not read Sales J's judgment in 4Eng as indicating that the remedy under section 423 cannot go further than the value of any obligations of the transferor to the victims at the time when the court comes to consider the imposition of the remedy. Such a principle would risk creating an unfairness to the victims where, as here, a substantial period of time has elapsed between the date of the impugned transaction and the date when the remedy is devised and where the relationship between the various parties has changed in ways which have, at the least, been influenced by the fact that the impugned transaction took place. The 4Eng judgment was not intended to limit the exercise of the court's discretion in the way suggested. Such a conclusion would be inconsistent with the passages in that judgment and in the other case law referring to the need for the relief to be carefully tailored to the justice of the particular case and to the absence of any 'hard and fast rules' that might impede a just result."
"It seems to me therefore that the mechanism proposed by Sequana would thwart the intentions of the parties to the Funding Agreement. That intention was that anything recovered from Sequana as a result of these proceedings would go straight into the pot held by BTI in order to pay for the clean up and that that would be in addition to the other liabilities of the parties to the Agreement. A remedy under which no monies are in fact paid, but rather a debt is reconstituted and the call down of the debt is limited to AWA's three liabilities, undermines the bargain that the parties struck as a pragmatic solution to the predicament they found themselves in. It would bypass the possibility of there being any 'Sequana Recoveries' for the purposes of the agreement, despite the success of BAT in its claim in respect of the May Dividend. Such a result would not help restore the victims to their pre-transaction position nor protect their interests. If the May Dividend had not been paid then the inter-company debt owed by Sequana to AWA would not have been extinguished. Regardless of whether AWA would then have been sold, it would have had immediately available to it those monies to meet any demands that came in for reimbursement of the ongoing costs. There is no doubt that the Funding Agreement was negotiated in the context where AWA was outside the Sequana group and had few prospects of obtaining any more funds over future years. It is difficult to imagine that AWA's liability would have been limited to $10 million in relation to refunding the sums that had been paid out for the remediation between the date when AWA stopped making payments in April 2012 to the date of the Agreement in September 2014 if the context had been different. I find it hard to believe that the scope of AWA's responsibility for payment in respect of BAT's or API's liabilities would have been as limited as it is in fact under the Funding Agreement."
"the amount of the May Dividend plus interest at the rate previously applied to the inter-company debt (i.e the EURIBOR overnight rate plus 0.25%) for the period 18 May 2009 to the date of issue of these proceedings (i.e 9 December 2013) and thereafter at the U.S. dollar Libor 12 month rate plus 2% to the date of this order less the Lump Sum which shall be converted to Euros at the rate of €1/US$1.27."
"But in light of the findings in the Main Judgment, Sequana should have conceded when the s 423 claim was lodged that the May Dividend was caught by section 423. Given that I have now found that an immediate payment should in principle be made in respect of past costs, Sequana ought to have offered to make a payment at that point. It follows that interest should run at the higher commercial rate from that time and I will so order."
Breach of duty: introduction
"(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to-
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment.
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
(2) …
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company."
"Without qualifying our opinion we draw attention to note 15 to the financial statements, which describes how the Company has indemnified a former subsidiary company, Appleton Papers Inc, for costs in connection with the costs of investigation, remediation of and other costs related to the alleged contamination of the Lower Fox River in Wisconsin, USA. The valuation of this liability and its settlement date, together with the realisation of potential contingent insurance policy assets, involve significant judgements by the Company. While the Directors have carried out an assessment of the position at 31 December 2008, this matter will still depend on the rulings of court cases and other agreements with relevant other parties in the future, the outcome of which are not certain at the date of these financial statements, nor necessarily under the control of the Company."
"32-4. Uncertainties are regarded as significant when they involve a significant level of concern about the validity of the going concern basis or other matters whose potential effect on the financial statements is unusually great. A common example of a significant uncertainty is the outcome of major litigation."
Breach of duty: the judgment below
"To say that my house is on the verge of burning down seems to me to describe a much more worrying situation compared to one in which there is a risk which is something more than a remote risk of my house burning down. Similarly, giving the words their natural meaning, a test set at the level of 'a real (as opposed) to remote risk of insolvency' would appear to set a much lower threshold than a test set at the level of being 'on the verge of insolvency' or of 'doubtful' or 'marginal' solvency. But I agree with the conclusion of Mr Randall QC in HLC Environmental that the authorities appear to treat these and all the other formulations as different expressions of the same test. Having reviewed the authorities I do not accept that they establish that whenever a company is 'at risk' of becoming insolvent at some indefinite point in the future, then the creditors' interests duty arises unless that risk can be described as 'remote'. That is not what the cases say and there is no case where, on the facts, the company could not also be accurately described in much more pessimistic terms, as actually insolvent or 'on the verge of insolvency', 'precarious', 'in a parlous financial state' etc."
"It cannot be right that whenever a company has on its balance sheet a provision in respect of a long term liability which might turn out to be larger than the provision made, the creditors' interests duty applies for the whole period during which there is a risk that there will be insufficient assets to meet that liability. That would result in directors having to take account of creditors' rather than shareholders' interests when running a business over an extended period. This would be a significant inroad into the normal application of directors' duties. To hold that the creditors' interests duty arises in a situation where the directors make proper provision for a liability in the company's accounts but where there is a real risk that that provision will turn out to be inadequate would be a significant lowering of the threshold as currently described and applied in the cases to which I have referred. I can see no justification in principle for such a change."
"Taking all these factors into account, I do not think that AWA could be described as on the verge of insolvency or of doubtful insolvency [sic], or as being in a precarious or parlous financial state. The risk it faced that the best estimate would turn out to be wrong and that the company might not have enough money, when called upon in the future, is a risk that faces many companies that have provisions and contingent liabilities reflected in their accounts. It is not enough in my judgment to create a situation where the directors are required to run the company in the interests of the creditors rather than the shareholders of the company."
Breach of duty: the authorities
"Indeed, the emphasis given by the primary judge to the circumstance that the group derived a benefit from the transaction tended to obscure the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. The creditor of a company, whether it be a member of a "group" of companies in the accepted sense of that term or not, must look to that company for payment. His interests may be prejudiced by the movement of funds between companies in the event that the companies become insolvent."
"There remains the question whether the grant of the pension was in the circumstances a misfeasance committed by the two directors who procured the grant and by the respondent, the director who accepted the grant. If the company had been doubtfully solvent at the date of the grant to the knowledge of the directors, the grant would have been both a misfeasance and a fraud on the creditors for which the directors would remain liable. But the good faith of the directors is not impugned.
In the absence of fraud there could still have been negligence on the part of the directors. If the company could not afford to spend £10,000 on the grant of a pension, having regard to problems of cash-flow and profitability, it was negligent of the directors to pay out £10,000 for the benefit of the respondent at that juncture. There could have been gross negligence, amounting to misfeasance. If the company could not afford to pay out £10,000 and was doubtfully solvent so that the expenditure threatened the continued existence of the company, the directors ought to have known the facts and ought at any rate to have postponed the grant of the pension until the financial position of the company was assured.
The findings of the judge are sufficient to support the suspicion that the company could not afford to pay out £10,000 for the benefit of the respondent, but this suspicion is largely based on hindsight. The accounts show that business was expanding, that there were no discernible cash-flow problems and that past profits were sufficient to absorb half of the payment for the pension, leaving the other half to be absorbed in the future. There seemed to be every indication that with the profits anticipated, and the possibility of reducing directors' salaries if necessary, the remainder of the payment for the pension could be absorbed by the company. In these circumstances it is difficult to convict the directors of negligence. It is impossible to convict them of gross negligence amounting to misfeasance because the allegation was never clearly levied, the directors were not even accused by the liquidator and did not give evidence, and the judge therefore made no sufficient finding."
"The Multinational case was, however, a wholly different case from the present. In the present case the West Mercia company was at the relevant time insolvent to the knowledge of the directors. They had been expressly told not to deal with the company's bank account, and Mr Dodd had, in fraud of the creditors of the company, made the transfer to the Dodd company's account for his own sole benefit in relieving his own personal liability under his guarantee. In the Multinational case, at the time of the transaction which was in question, the company concerned was amply solvent, and what the directors had done at the bidding of the shareholders had merely been to make a business decision in good faith, and act on that decision. It subsequently turned out to be a bad decision, but the position had to be decided on the facts at the earlier stage, where the company was amply solvent and the parties were acting in good faith."
"In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration."
"The duties of directors are owed to the company. On the facts of particular cases this may require the directors to consider inter alia the interests of creditors. For instance creditors are entitled to consideration, in my opinion, if the company is insolvent, or near-insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise its solvency.
The criterion should not be simply whether the step will leave a state of ultimate solvency according to the balance sheet, in that total assets will exceed total liabilities. Nor should it be decisive that on the balance sheet the subscribed capital will remain intact, so that a capital dividend can be paid without returning capital to shareholders. Balance sheet solvency and the ability to pay a capital dividend are certainly important factors tending to justify proposed action. But as a matter of business ethics it is appropriate for directors to consider also whether what they do will prejudice their company's practical ability to discharge promptly debts owed to current and likely continuing trade creditors.
To translate this into a legal obligation accords with the now pervasive concepts of duty to a neighbour and the linking of power with obligation. It is also consistent with the spirit of what Lord Haldane said [in Attorney-General for Canada v Standard Trust Company of New York [1911] AC 498 at 503-505]. In a situation of marginal commercial solvency such creditors may fairly be seen as beneficially interested in the company or contingently so.
On the other hand, to make out a duty to future new creditors would be much more difficult. Those minded to commence trading with and give credit to a limited liability company do so on the footing that its subscribed capital has not been returned to the shareholders, but otherwise they must normally take the company as it is when they elect to do business with it. Short of fraud they must be the guardians of their own interests.
In the case of a supplier who already has an established trade relationship with a company, there is of course a distinction between current and future debts. It seems to me neither necessary nor desirable, however, to use that distinction so as to limit the duties of the directors of the debtor company to considering whether debts already incurred can be paid. If the company's financial position is precarious the fortunes of such suppliers may be so linked with those of the company as to bring them within the reasonable scope of the directors' duties. They may continue to give credit in ignorance of a change damaging to their prospects of payment.
The recognition of duties to creditors, restricted as already outlined, is justified by the concept that limited liability is a privilege. It is a privilege healthy as tending to the expansion of opportunities and commerce; but it is open to abuse. Irresponsible structural engineering – involving the creating, dissolving or transforming of incorporated companies to the prejudice of creditors – is a mischief to which the Courts should be alive. But a balance has to be struck. There is no good reason for cultivating a paternal concern to protect business people perfectly able to look after themselves.
For those reasons, among the many authorities cited to us I would respectfully adopt the approach of Cumming-Bruce and Templeman LJJ in Re Horsley & Weight Ltd [1982] Ch 442, 454-456. Both Lord Justices favoured an objective test: whether at the time of the payment in question the directors "should have appreciated" or "ought to have known" that it was likely to cause loss to creditors or threatened the continued existence of the company. In my opinion, a payment made to the prejudice of current or continuing creditors when a likelihood of a loss to them ought to have been known is capable of constituting misfeasance by the directors; and they may be made liable for it in an action of the present kind. Alternatively an application may be made under s 321 of the Companies Act, which in the substituted form enacted in 1980 extends to "any negligence, default, or breach of duty or trust in relation to the company".
I also share the view to which Cumming-Bruce and Templeman LJJ evidently inclined in their obiter observations that in such cases the unanimous assent of the shareholders is not enough to justify the breach of duty to the creditors. The situation is really one where those conducting the affairs of the company owe a duty to creditors. Concurrence by the shareholders prevents any complaint by them, but compounds rather than excuses the breach as against the creditors".
"Turning now to the wider legal issue, the traditional view has been that apart from statutory obligations to take into account the interests of creditors (in particular s 320 and also ss 311B, 311C, 315A, 315B, 315C and 364 of the Companies Act 1955) and the general obligation to maintain the company's capital, directors are not required to have regard to the interests of creditors in exercising their responsibilities: their concern is with the financial interests of the shareholders. In recent years a wider view of directors' responsibilities has been expressed in some of the cases in a number of common law jurisdictions (see (1984) 11 NZULR 68). If this Court is to move in that direction its decision to do so would need to be based on a thorough examination of the scheme and purpose of the companies' legislation. I prefer to leave that for a case where this question, itself a difficult amalgam of principle, policy, precedent and pragmatism, must be decided."
"In the case of an insolvent company, at least in the sense that its liabilities exceed its assets, directors in the management of a company must have regard to the interests of creditors. That is because according to the order of application of assets on a winding up they are trading with the creditors' money. It has been suggested that when the solvency of a company is doubtful or marginal it will be a misfeasance (probably not capable of being ratified or exonerated by shareholders) to enter into a transaction which directors ought to know is likely to cause a loss to creditors – see eg Re Horsley & Weight Ltd [1982] Ch 442, 455 per Cumming-Bruce LJ, and Templeman LJ. Whether that is so does not in my view fall to be decided now for in the instant case I am satisfied the company was solvent at the material times."
"It is, to my mind, legally and logically acceptable to recognise that, where directors are involved in a breach of their duty to the company affecting the interests of shareholders, then shareholders can either authorise that breach in prospect or ratify it in retrospect. Where, however, the interests at risk are those of creditors I see no reason in law or in logic to recognise that the shareholders can authorise the breach. Once it is accepted, as in my view it must be, that the directors' duty to a company as a whole extends in an insolvency context to not prejudicing the interests of creditors (Nicholson v Permakraft (NZ) Ltd and Walker v Wimborne) the shareholders do not have the power or authority to absolve the directors from that breach.
I hesitate to attempt to formulate a general test of the degree of financial instability which would impose upon directors an obligation to consider the interests of creditors. For present purposes, it is not necessary to draw upon Nicholson v Permakraft as authority for any more than the proposition that the duty arises when a company is insolvent inasmuch as it is the creditors' money which is at risk, in contrast to the shareholders' proprietary interests. It needs to be borne in mind that to some extent the degree of financial instability and the degree of risk to the creditors are inter-related. Courts have traditionally and properly been cautious indeed in entering boardrooms and pronouncing upon the commercial justification of particular executive decisions. Wholly differing value considerations might enter into an adjudication upon the justification for a particular decision by a speculative mining company of doubtful stability on the one hand, and, on the other hand, by a company engaged in a more conservative business in a state of comparable financial instability. Moreover, the plainer it is that it is the creditors' money that is at risk, the lower may be the risk to which the directors, regardless of the unanimous support of all of the shareholders, can justifiably expose the company.
The foregoing, and like, considerations point to the desirability of avoiding an attempt to enunciate principles in wide-ranging terms. Having said that, however, I reiterate my own respectful agreement with the passage in the judgment of Cooke J (at 457-460) to which I have already referred."
"The interests of a company, an artificial person, cannot be distinguished from the interests of the persons who are interested in it. Who are those persons? Where a company is both going and solvent, first and foremost come the shareholders, present and no doubt future as well. How material are the interests of creditors in such a case? Admittedly existing creditors are interested in the assets of the company as the only source for the satisfaction of their debts. But in a case where the assets are enormous and the debts minimal it is reasonable to suppose that the interests of the creditors ought not to count for very much. Conversely, where the company is insolvent, or even doubtfully solvent, the interests of the company are in reality the interests of existing creditors alone."
"What is accepted here is that Brady remained solvent after the dispositions had taken place and also that they were made in good faith, that is to say without any positive intention to defraud creditors. But there is no evidence which shows that the interests of creditors were ever considered. The directors never asked themselves whether half the assets would in all eventualities be sufficient to discharge all the existing debts. The proportion of the assets being removed was so large as to make it essential for that question to be asked. Since it was not asked it cannot in my view be said, for the purposes of an exception to the provisions of sec. 151, that the directors considered that the dispositions were in the interests of the two companies. The most which can be said is that they considered that they were in the interests of the shareholders."
"Statements of principle may be expressed more broadly than is warranted by the facts of the particular case. But where a formula extending the creditors' interests duty to a situation short of insolvency is cited by the court in a case where the company was in fact found to be insolvent or to be very close indeed to insolvency, or conversely where the court was satisfied that there was no problem with the company's solvency, it is unlikely that the court had turned its mind to the precise point at which a solvent company crosses some threshold which causes the creditors' interests duty to arise."
"These authorities and the principles expressed in them entitle Mr Crystal to submit that the duty owed by Mr Hinchliffe and Mr Harrison to Facia Footwear Ltd in April and May 1996 was a duty that required them to take into account the interests of creditors. The whole Facia Group, and Facia Footwear Ltd as an individual company, were in a very dangerous financial position. The future of the group probably depended on satisfactory refinancing arrangements becoming available."
"Second, however, when a company, whether technically insolvent or not, is in financial difficulties to the extent that its creditors are at risk, the duties which the directors owe to the company are extended so as to encompass the interests of the company's creditors as a whole, as well as those of the shareholders."
"150. Recent Australian authority is to similar effect. For example, in Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 25 A.C.L.C. 1094, Giles J.A. (with whom Ipp and Basten JJA agreed) said (at [162]):
"It is sufficient for present purposes that, in accord with the reason for regard to the interests of creditors, the company need not be insolvent at the time and the directors must consider their interests if there is a real and not remote risk that they will be prejudiced by the dealing in question. "
This passage was quoted with apparent approval in Bell Group Ltd v Westpac Banking Corp [2008] WASC 239 and, on appeal, Westpac Banking Corp v Bell Group [2012] WASCA 157. At first instance, Owen J having quoted from Kalls (above), said (at [4445]):
"The basic principle is that a decision that has adverse consequences for creditors might also be adverse to the interests of the company. Adversity might strike short of actual insolvency and might propel the company towards an insolvency administration. And that is where the interests of creditors come to the fore."
"It is clear that established, definite insolvency before the transaction or dealing in question is not a pre-requisite for a duty to consider the interests of creditors to arise. The underlying principle is that directors are not free to take action which puts at real (as opposed to remote) risk the creditors' prospects of being paid, without first having considered their interests rather than those of the company and its shareholders. If, on the other hand, a company is going to be able to pay its creditors in any event, ex hypothesi there need be no such constraint on the directors. Exactly when the risk to creditors' interests becomes real for these purposes will ultimately have to be judged on a case by case basis. Different verbal formulations may fit more comfortably with different factual circumstances."
"The common law goes further than this, treating the interests of an actually or prospectively insolvent company as synonymous with those of its creditors: West Mercia Safetyware v Dodd [1988] BCLC 250. The duty to have regard to the interests of creditors is not one of the general duties of directors identified in the statute, but the common law duty is preserved by section 172(3) of the Act, notwithstanding the directors' obligation to serve the interests of members."
"123. It is well established that the fiduciary duties of a director of a company which is insolvent or bordering on insolvency differ from the duties of a company which is able to meet its liabilities, because in the case of the former the director's duty towards the company requires him to have proper regard for the interest of its creditors and prospective creditors. The principle and the reasons for it were set out with great clarity by Street CJ in Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722,730."
"It was by reason of the uncertainty, upon the cases, of the ambit of a director's duty to creditors in cases in which a company is not shown to be insolvent, but is in obvious financial difficulties, that the respondent sought to establish a general duty to creditors irrespective of insolvency or financial difficulties, but it seems to me that as a matter of law there is middle ground which the respondent can occupy in the circumstances of this case…
I would state the basis upon which such actions are to be judged "improper" as follows:
1. A director of a company X Ltd who, upon acquiring information which leads him to believe that the company faces a risk of liquidation, whether voluntary and because it cannot pay its debts as they fall due or at the suit of creditors, which is a real and not a remote risk, thereupon acts to protect himself and other companies of which he is a director from the consequences of such liquidation, to the possible detriment of the creditors of X Ltd, is acting "improperly" as a director of X Ltd because:
(a) There can be no doubt of such possible detriment when the action taken involves a disposition of the assets of X Ltd, in this case debts owing to X Ltd, which would be part of the fund available to creditors generally in the event of liquidation. It is in the words of Richardson J in Nicholson & Ors v Permakraft (NZ) Ltd (in liq), supra, "the creditors' money that is at stake".
(b) If that is the principle which dictates the "duty" of a director to have regard to the interest of creditors when the company is known to be insolvent there can be no reason in principle why knowledge of a real risk of insolvency should not attract the same duty.
1. Whether there is such a real and perceived risk of insolvency must depend upon the facts of the particular case."
"Mr Baloglow may not have had clear knowledge of insolvency of TQLS, which to him equated to AA. Knowledge of insolvency was not necessary for knowledge of breach of fiduciary duty. It was sufficient, if with his knowledge, Mr Baloglow wilfully and recklessly failed to make the enquiries an honest and reasonable man would make about a real and not remote risk that creditors would be prejudiced by payment to him of the $555,000, or that an honest and reasonable man would have thought that there was that risk."
"At least where the company is facing insolvency as well as considering the company's interests the directors must consider the interests of its creditors: Walker v Winborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liquidation) (1986) 4 NSWLR 722. In Grove v Flavel (1986) 43 SASR 410 the Court said at 421 that the interests of creditors must be considered where to the knowledge of the directors there is a real and not remote risk of insolvency, and of course the risk includes the effect of the dealing in question. (Grove v Flavel was disapproved in Spies v The Queen (2000) 201 CLR 603 at [95] so far as it suggested a direct duty owed to and enforceably by creditors, but not as to this matter.) It is sufficient for present purposes that, in accord with the reason for regard to the interests of creditors, the company need not be insolvent at the time and the directors must consider their interests if there is a real and not remote risk that they will be prejudiced by the dealing in question."
"In my view these statements all suggest that a financial state short of actual solvency [this must be a misprint for "insolvency"] could be sufficient to trigger the obligation to take into account the interests of creditors. Again, in my view, this approach accords with principle. The basic principle is that a decision that has adverse consequences for creditors might also be adverse to the interests of the company. Adversity might strike short of actual insolvency and might propel the company towards an insolvency administration. And that is where the interests of creditors come to the fore."
Breach of duty: conclusion on the authorities
Breach of duty: other considerations
"Others of us, believe, however, that even as drafted the principle gives inadequate guidance to directors and depends on their being able to discern an intermediate stage on the path to insolvency which is not identifiable in reality. In the view of these members the break from a going concern to an insolvent basis of trading is normally so abrupt and rapid in practice that references to calculating the probabilities and to "sliding scales" of risk and benefit are unhelpful and potentially misleading. The incorporation of the section 214 rule in the statement will, in their view, be sufficient in practice and would avoid the serious disadvantages of the broader and less precise principle. The advantages and disadvantages of such a principle are very much a matter of commercial judgment, on which we have not been able to reach an agreed view nor, in the time available, to consult on the basis of a clear draft. We recommend that the DTI should do so."
"Directors would need to take a finely balanced judgment, and fears of personal liability might lead to excessive caution. This would run counter to the 'rescue culture' which the Government is seeking to promote through the Insolvency Act 2000 and the Enterprise Bill now before Parliament."
"331. Subsection (3) recognises that the duty to promote the success of the company is displaced when the company is insolvent. Section 214 of the Insolvency Act 1986 provides a mechanism under which the liquidator can require the directors to contribute towards the funds available to creditors in an insolvent winding up, where they ought to have recognised that the company had no reasonable prospect of avoiding insolvent liquidation and then failed to take all reasonable steps to minimise the loss to creditors.
332. It has been suggested that the duty to promote the success of the company may also be modified by an obligation to have regard to the interests of creditors as the company nears insolvency. Subsection (3) will leave the law to develop in this area."
"(1) A solvency statement is a statement that each of the directors-
(a) has formed the opinion, as regards the company's situation at the date of the statement, that there is no ground on which the company could then be found to be unable to pay (or otherwise discharge) its debts; and
(b) has also formed the opinion-
(i) if it is intended to commence the winding up of the company within twelve months of that date, that the company will be able to pay (or otherwise discharge) its debts in full within twelve months of the commencement of the winding up: or
(ii) in any other case, that the company will be able to pay (or otherwise discharge) its debts as they fall due during the year immediately following that date.
(2) In forming those opinions, the directors must take into account all of the company's liabilities (including any contingent or prospective liabilities)."
"(3) It must state that, having made full inquiry into the affairs and prospects of the company, the directors have formed the opinion-
(a) as regards its initial situation immediately following the date on which the payment out of capital is proposed to be made, that there will be no grounds on which the company could then be found unable to pay its debts, and
(b) as regards its prospects for the year immediately following that date, that having regard to-
(i) their intentions with respect to the management of the company's business during that year, and
(ii) the amount and character of the financial resources that will in their view be available to the company during that year,
the company will be able to continue to carry on business as a going concern (and will accordingly be able to pay its debts as they fall due) throughout that year.
(4) In forming their opinion for the purposes of subsection (3)(a), the directors must take into account all of the company's liabilities (including any contingent or prospective liabilities)."
Conclusion
Lord Justice Henderson:
Lord Justice Longmore: