4 June 2019
This was a Court of Appeal decision which focused on s423 Insolvency Act 1986, as well as the ambit of directors' duties to creditors in a distressed company scenario. The below summary relates to the courts' analysis of the latter issue.
Appleton Papers Inc (API) was a wholly owned subsidiary of BAT Industries plc (BAT).
In 1978, API acquired two paper coating business operating in Wisconsin, USA. API took over the liabilities of National Cash Register Company (NCR) who were the seller, and as a part of this, BAT agreed to indemnify NCR against any failure by API to meet those liabilities.
BAT established Wiggins Teape Appleton Inc (later known as AWA) as a holding company for API.
The businesses acquired by API had been responsible for extensive pollution in Lower Fox River in Wisconsin, and in the 1990s, significant claims were brought against NCR and API under the (US) Comprehensive Environmental Response, Compensation and Liability Act 1980. The claims related to clean-up costs and damages in respect of the pollution.
In 2000, Sequana SA (S) acquired AWA and became its parent company.
The subject of this litigation related to two dividends paid by AWA to S:
At the time these dividends were declared and paid, AWA had ceased to trade and had one contingent and material liability: its share of the clean-up costs, since it had indemnified API in respect of these before selling its subsidiary.
By way of assets, AWA had:
Extensive efforts were made to quantify AWA's contingent liability, following which the directors concluded that the AIG investment contract would provide adequate cover.
AWA originally brought claims in respect of the dividends against its directors, who authorised the payment of the dividend; and against S, as constructive trustee of those monies. It alleged that the directors had breached their duty to have regard to the interests of AWA's creditors.
AWA assigned its claims to BTI 2014 LLC (BTI), a vehicle set up by BAT. Accordingly, BTI replaced AWA as claimant.
Rose J dismissed all claims in relation to the December dividend. In relation to the May dividend, she dismissed the actions against the directors.
BTI appealed to the Court of Appeal against the dismissal of the claims against AWA's directors, even though it accepted that the May dividend was lawfully paid within Part 23 of the Companies Act 2006 and within the parameters of common law restrictions on distributions to shareholders. Its argument was that the directors owed a duty to consider creditors' interests 'in any case where a proposal involves a real, as opposed to a remote, risk to creditors'.
Under s172(1) Companies Act 2006, directors must promote the success of the company for the benefit of its shareholders. Nevertheless, S172(3) states that this duty is "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".
However, when does the duty to consider creditors' interests "kick in"? How does it dovetail with directors' duties to members of the company; and how does a director discharge this duty?
Judgment
Richards LJ gave the leading judgment.
He acknowledged the difficulty of making a definitive pronouncement with a "single form of words" to apply in all situations. However, he set out some helpful guidance:
The Court of Appeal affirmed the decision of the High Court, dismissing BTI's appeal.