Ordinarily, it would be entirely proper for a substantial inter-company receivable between a parent company and a non-trading subsidiary to be removed. This can be effected by way of a reduction in the subsidiary’s capital (by virtue of section 642 and Part 23 of the CA 2006).
However, in the case of the Windward/Sequana receivable (which by 2005 stood at over £450 million), the position was complicated by the fact that the Lower Fox River exposure was very difficult to ascertain.
In 2008, the directors of Windward resolved to undertake the exercise of working out how much money could be taken out by way of dividend to Sequana. In consultation with various professional advisers and consultants, the directors took steps to ascertain the exposure net of the Maris Policy based on current expectations as to the various components of the exposure, arriving at a provision of approximately €60 million. On that basis, the directors resolved at a meeting in December 2008 (based on interim accounts) to reduce the company’s share capital and pay a dividend of around €440 million, leaving an outstanding inter-company debt of around €140 million.
Following the December 2008 dividend, Windward and its advisers focused on a US Supreme Court decision relating to CERCLA which was taken to suggest that API’s share of the liability could be significantly reduced. This expectation was reflected in Windward’s audited final accounts for the year ended December 2008 which reduced the provision to zero. This in turn created additional distributable reserves and, in consequence, a further dividend of approximately €130 million was paid to Sequana in May 2009. Very shortly afterwards, Windward was sold, thereby removing any exposure to the Lower Fox River from Sequana.
In these proceedings, BAT challenged the payment of the two dividends on a number of grounds, all of which involved the Court assessing what the directors knew and thought in December 2008 and May 2009. While the Court was at pains to point out that it had shielded its eyes from subsequent events in order to avoid its assessment being coloured by hindsight, it is to be presumed that Windward’s share of the Lower Fox River clean-up costs have exceeded, or will exceed, the sums available to Windward from the historic insurance policies and the Maris Policy (hence the need for these proceedings).