Being involved with a company which is experiencing financial difficulties is clearly a stressful experience for directors. As well as having to deal with the operational consequences of the company’s distress, directors must ensure that they comply with their duties and obligations under the Companies Act 2006 (CA2006) and the Insolvency Act 1986 (IA1986). Directors of listed entities are in a particularly difficult position, as in addition to those duties they must comply with their obligations to the markets.

Directors’ duties

In this week's update: directors did not need to consider the rights of creditors when declaring a dividend as the company was not insolvent, the Law Commission is seeking views on the law of intermediated securities, polling information can be inside information and a couple of other items.

Court considers whether demerger by dividend was valid (part 4)

In this week's update: a distribution was valid despite discrepancies in the accounts justifying the dividend and an examination of vexatious resolutions.

Court considers whether demerger by dividend was valid (part 2)

In this week's update: directors implementing a management buy-out did not owe fiduciary duties to the other shareholders and a distribution was valid despite the relevant accounts not being in the usual format.

Directors did not owe fiduciary duty to shareholders

The High Court has held that the directors of a company did not owe a fiduciary duty to the company’s shareholders when implementing a management buy-out (MBO).

What happened?

The Institutional Limited Partner Association (ILPA) has published recommendations for how “GP-led fund restructurings” should be organised. These transactions occur when a fund sponsor (GP/manager) introduces a secondary purchaser to buy assets out of one of its existing funds, typically into a new fund structure where the same GP is the manager. Such transactions are complex and inevitably throw up conflict issues. Investors regularly complain that GPs are short on transparency and slapdash with timelines when trying to do one of these deals.

No. The Court of Appeal upheld the High Court’s original finding, namely that no duty to consider AWA’s creditors had arisen. Whilst AWA’s directors had made provision for the contingent liabilities in question, this did not itself mean AWA was insolvent or close to insolvency. In fact, it was not, and so the duty to consider AWA’s creditors never arose.

Practical implications

Although this decision simply confirms the High Court’s original decision, it emphasises the care and vigilance with which directors of a company need to act when paying dividends.

Court confirms dividends can be transactions at an undervalue

The Court of Appeal has confirmed that a dividend paid by a company to its shareholders can constitute a transaction at an undervalue under insolvency law.

What happened?

At the initial hearing, the High Court found the dividend was caught by section 423 and was therefore invalid. Importantly, it said that a dividend could constitute a transaction at an undervalue. This was an important confirmation, and the High Court has since followed this approach (for example, in Dickinson v NAL Realisations (Staffordshire) Ltd).

In BTI 2014 LLC v. Sequana SA & Ors [2019], the Court of Appeal upheld the High Court decision that dividends can be challenged as transactions defrauding creditors under the Insolvency Act 1986.

In BTI 2014 LLC v. Sequana SA & Others [2019], the Court of Appeal upheld the decision of the High Court that dividends can be challenged as transactions defrauding creditors under section 423 of the Insolvency Act 1986 (the '1986 Act').

The first instance decision:

The court has decided to allow a shareholder to pursue a derivative claim on behalf of a company that was placed into a pre-pack administration.

What happened?

Montgold Capital LLP v Ilska and others involved a restaurant company which was placed into a “pre-pack” administration, under which its entire business was sold, in late 2016.