Energy and insolvency: When may an insolvent company pay a dividend?

In TAQA Bratani Ltd & Ors v Fujairah Oil and Gas UK LLC & Ors [2025] EWCA Civ 1669 the Court of Appeal decided that a c.US$84m dividend paid by RockRose UKCS8 LLC (“UKCS8”) shortly before its sale to Fujairah International Oil & Gas Corporation (“FIOGC”) for US$1 contravened section 238 of the Insolvency Act 1986 (“IA”). In reaching its decision, the Court of Appeal set guidelines for what amounted to a “transaction” as an undervalue in the context of a dividend, and when the defence in section 238(5)(b) is available.

The decision will be of interest to those advising on the payment of dividends by companies that have long-term liabilities or may be insolvent.  It will also be of particular interest to practitioners in the oil and gas industry. UKCS8 was a participant in the Brae fields, which at the time of its sale were on the cusp of decommissioning with the total decommissioning costs for all participants estimated at around US$1.8 billion and significant decommissioning security becoming due. 

Background

Together with TAQA Bratani (“TAQA”), Spirit Energy Resources Limited (“Spirit”) and others, UKCS8 (a Delaware LLC) held interests in the Brae field in the North Sea, and was also party to decommissioning security arrangements requiring the provision of substantial annual security. 

UKCS8’s then parent, RockRose Energy Limited (“RockRose”) agreed to sell UKCS8 to FIOGC for US$1. The SPA (signed on 15 December 2020) included a clause that, on completion, UKCS8 and its subsidiaries would waive amounts due from the seller’s (RockRose’s) group.  Shortly before completion, an intercompany receivable (c.$84m) owed by RockRose to UKCS8 was identified.  On 24 December 2020, the same day that the sale completed, UKCS8 declared a dividend in favour of RockRose, extinguishing the receivable.

Also on the day of completion, RockRose wrote off around US$53.7m owed to RockRose by another group company (UKCS9) relating to a pension buy-out payment (the “pension write-off”). UKCS9 was the statutory employer of RockRose group personnel and another company, RockRose UKCS11 Limited, was the group service company.

UKCS8 later entered liquidation; the liquidators’ section 238 IA rights were assigned to the Appellants (TAQA/Spirit).

Commercial Court

TAQA and Spirit commenced proceedings in the Commercial Court under s.423 and s.238 of the IA, and for the tort of unlawful means conspiracy. RockRose successfully defended proceedings in the Commercial Court. A summary is found at pages 56 - 58 of the CMS Annual Review of developments in English Oil and Gas Law (2025). 

The key legal issues

TAQA and Spirit (the Appellants) advanced three (3) grounds of appeal:

1. Ground 1: The judge should have treated the December 2020 dividend alone as the relevant “transaction” for section 238 of the IA, not the wider sale arrangement comprising the SPA plus linked steps.
2. Ground 2: Section 238(5) of the IA provides that the court shall not make an order unless it is satisfied (a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and (b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.  Here, the Judge erred in the application of 238(5) of the IA, particularly 238(5)(b), the so-called ‘objective’ test.  Even if the wider arrangement were relevant, the judge still failed to assess whether paying the dividend itself could reasonably be believed to benefit UKCS8.
3. Ground 3: The judge wrongly treated the pension write‑off as consideration for the transaction.

Court of Appeal decision

The Court of Appeal allowed TAQA and Spirit’s appeal in relation to all three grounds. 

The Court of Appeal observed:

1. The judge’s observations around the overlap between s238 and s423 were misconceived.  While there are notable similarities between s.423 and s.238 of the IA, s. 238 was introduced to enable undervalue claims without needing to prove motive and has other distinguishing features.
2. The differences between s.423(3) and s.238(5) reflect the more targeted focus of s.238. It can apply only where the company (a) is or becomes insolvent as a result of the transaction; and (b) enters into an insolvency process within a specified period. Also, the right to apply under s.238 is also confined to the office-holder (in this case the Appellants acquired the right by assignment). 
3. The defence in s.238(5) raises different issues. Section 238(5)(b) contains an objective test which s.423(3) does not. Section 238(5)(a) is also in different terms to s.423(3), requiring demonstration not only of good faith but of business purpose.
4. While a successful invocation of the defence in s.238(5) may very well mean that there is no claim under s.423, the converse does not follow.
5. The fact that s.238(5) contains different and more challenging tests from the perspective of a defendant than s.423(3) reflects the fact that insolvent companies should not, as a general rule, enter into transactions that deplete assets available for creditors, undermining the pari passu principle by instead preferring the interests of their shareholders.
6. It is unsurprising in those circumstances that the defence available under s.238(5) is relatively narrowly targeted. In contrast, s.423 is not restricted to cases of insolvency.

In relation to each of the grounds of appeal:

(a) Ground 1:

The transaction was the dividend alone. Section 238(2) applies where a company has at a relevant time “entered into a transaction with any person at an undervalue”. There must therefore not only be a transaction, but it must be entered into with a person, and at an undervalue. In other words, the company must be a party to the transaction.

Here, there was an arrangement entered into by UKCS8 under which it declared the dividend with the effect of extinguishing the US$84.7m receivable. That was an arrangement that UKCS8 entered into with its parent, RockRose, on 24 December 2020. However, that was the only transaction which UKCS8 entered into. UKCS8 was not a party to the SPA. The SPA was an agreement between RockRose and FIOGC which had been entered into 9 days earlier and which had UKCS8 (or strictly, the membership interest in it) as its subject matter. The dividend was an “afterthought” which was decided upon only after the SPA was agreed, when it was determined that it should be used as the means of removing the receivable as contemplated by clause 3.4 of the SPA.

(b) Ground 2:

The good faith defence failed:

1. The correct question to ask under s.238(5)(b) is whether there were, in the circumstances which prevailed at the time, reasonable grounds for believing that the dividend (being the relevant transaction) would benefit UKCS8.
2. Further, that question must be answered from the perspective of UKCS8, and not anyone else. That is the correct, and only, lens through which the transaction must be viewed.
3. This reflects the fundamental principle that, as a separate legal entity with its own creditors, the company’s interests must be considered separately from that of other members of the group.
4. On this analysis, however, it was held that the surrounding circumstances also needed to be considered in order to determine whether there were “reasonable grounds for belief”.
5. Here, the Court of Appeal did not consider that the dividend was a “necessary adjunct” to the sale.  The sale could have proceeded without the dividend. Further, the judge’s reliance on the alleged ‘cash and debt free’ provision in the SPA as the basis for the dividend represented an error in approach: the sale was not, in fact, predicated on this basis.  The write-off was not a condition precedent to completion.  In fact, the provision was not even a ‘cash free, debt free’ provision (there was no equivalent provision in respect of debt owed by UKCS8).  The clause had clearly been agreed for the benefit of RockRose and no other person.

(c) Ground 3:

The Court of Appeal decided the pension write-off was not to be treated as consideration ‘for’ the dividend.  There was no evidence to this effect.  It followed that it could not be taken into account in determining the undervalue and as a result, the amount of the undervalue was the full US$84.7m.  

Remedy

The Court of Appeal determined that the question of remedy under s.238(3) be remitted for determination by the Commercial Court (it having not been considered previously).  The Court has a wide discretion in this regard to make “such order as it thinks fit for restoring the position to what it would have been if the company had not entered into [the] transaction”.

Comment

There are a number of important points to take from the Court of Appeal decision:

1. Even in a ‘cash free, debt free’ (or similar) sale of a company, the usual insolvency laws apply. If the target company is or could be insolvent, removing assets prior to sale will risk claims under the IA.  In this case the company was a Delaware entity and the legality of the dividend from a corporate law perspective was not decided.  Where the company is an English entity, the circumstances where a company can make a lawful dividend by having distributable reserves but insufficient funds to pay the dividend may be less common but still relevant in the case of long-term liabilities, such as decommissioning.
    
2. Section 238 applies where “the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue”. In relation to identifying the ‘transaction’, taken together with the recent decision in Credit Suisse Virtuoso SICAV-SIF v Softbank Group Corp [2025] EWHC 2631 (Ch), this decision underlines the need for the ‘transaction’ to be carefully and precisely identified.  Emphasis will be placed on whether the company, itself, ‘entered’ into the transaction - irrespective of whether any broader deal is interlinked and/or commercially rational.  As such, in the context of a ‘target’ company disposing of an asset as part of its sale, the disposal of the asset may be the only “transaction” to which the target company “entered into”. As such, it will be that transaction that is open to scrutiny – rather than the wider company sale.
    
3. The above makes sense, as it seeks to protect the pari passu principle of insolvency law that underlines the statutory purpose of s.238.
    
4. The defence in s.238(5) says “The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied— (a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and(b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.” Although not impossible, it will be very difficult to invoke that defence in relation to the payment of a dividend – as it will be rare that, from the company’s perspective, as the payer of the dividend, the payment of the dividend will benefit the company (as required by s238(5)).
    
5. Notwithstanding the above, there are lawful ways to seek to achieve the commercial intent of a ‘cash free, debt free’ sale without risking a s.238 claim. For example, the buyer can pay for cash on a pound-for-pound basis.  It is common for accountancy firms to be engaged to prepare a detailed intercompany balances steps paper to deal with balances in a careful and lawful manner.   These types of arrangement will also protect the pari passu principle.
    
6. The defence under 238(5)(b) will be assessed strictly from the company’s viewpoint (as opposed to the parent, buyer, or group). 
    
7. Separately, in the case of an English company, if a distribution was made where there were insufficient distributable reserves, that transaction could be unlawful.
    
8. Finally, in the context of the very significant ‘tail’ decommissioning liabilities for oil and gas companies, the above has particular significance. Section 238 of the IA applies to a transaction made within a two (2) year lookback period ending with the onset of insolvency. As such, in the event that an oil company fails due to decommissioning liabilities, all transactions made in the two years period prior to that insolvency will be amenable to challenge (subject to the defence in s.238(5)) applying) by the insolvency office-holder. In addition, if the purpose of the transaction is to put the assets beyond the reach of creditors there will be additional protections in s423 of the IA, where there is no time limit (subject to more general limitation issues). That said, none of these protections are an effective substitute for ensuring that decommissioning liabilities are subject to appropriate value and quality of security.