Attention All Accountants: When are distributable funds no longer distributable?

November 2, 2022

2 November 2022:  Making big waves in the insolvency world in recent weeks has been the Supreme Court judgment in the case of BTI (2014) LLC vs Sequana SA and others. ‘So what?’ you would be forgiven for thinking. Well, the so what is that the judgment in this matter, despite not finding in the appellants favour, it did move the goalposts with respect to a directors responsibility to creditors and the additional consideration required when a company declares a dividend.

When are distributable funds no longer distributable?

Without going into any great detail on the facts of the case – there are many articles to search which do this – the central issue relates to the validity of a distribution made to a shareholder in light of the possibility of future insolvency of the company, albeit a very uncertain possibility due to potential, and as yet unquantified, liabilities.

The judgment said that a directors’ duty to creditors is not separate to their fiduciary duty and is indeed a subset of it. The issue is the trigger point at which the duty to creditors supersedes the duty to shareholders. The answer to that question is not clear cut but a sliding scale is suggested whereby the duty to creditors gains credence as the possibility of insolvency draws closer.

The defence in this case was that the dividend paid to the shareholder was valid on the grounds that it complied with the companies act with sufficient reserves at the time of issue. This was accepted as the possibility of liquidation remained remote, however, it would have been a different outcome had the dividend created a real risk of insolvency or left the company ‘bordering on insolvency’.

Therefore, when discussing a potential dividend with your clients please do bear in mind that simply being satisfied that there are sufficient reserves may not be enough to protect the directors against future claims of misfeasance if insolvency is to follow. If you believe that the payment of the dividend leaves the company financially ‘bordering on insolvency’ then consider advising against the payment.

If you or your clients would like to receive any guidance with respect to the issues raised above please do not hesitate to contact us here at BRI, where we will provide the right advice first time every time regardless of the fee outcome for ourselves.