11 August 2021 by Paul Croft
DSHE Holdings (Receivers and Managers Appointed) (In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4)  NSWSC 673
Summary of the judgement in the “dividend case”
The “dividend case” was one aspect of the litigation brought against the directors of DSHE Holdings Limited (Dick Smith). It was principally concerned with the application of s254T(c) of the Corporations Act, being that a company must not pay a dividend unless…”the payment does not materially prejudice the company’s ability to pay its creditors.”
Ultimately, the Court concluded that no breach of s254T(c) arose because the dividend payment either had no material impact on creditors or did not materially worsen the position of creditors through delayed payment.
However, the CFO – but not the Board - was found to have breached of his duty under s180(1) by voting in favour of paying the final dividend. At the time of preparing the final dividend paper, operational daily cash flows available to the CFO indicated that the dividend payment would materially worsen the position of creditors. An alternative finding may have eventuated had the CFO properly documented his rationale for concluding how the company might have avoided material prejudice to the creditors by paying the final dividend.
While the damages for a breach of s254T(c) may be limited to the value of unpaid creditors, a breach under s180(1) is much broader, encapsulating the harm to the company caused by paying the dividend, rather than the amount of the dividend. This will be particularly relevant in circumstances where, for example, a company becomes insolvent, or is at risk of becoming insolvent, due to the payment of a dividend.
Dick Smith paid an interim and final dividend in respect of the 2015 financial year. In forming their decisions to declare and pay those dividends, the directors relied on information contained in the monthly board packs, which included actual v forecast monthly trading analysis, monthly cash flow forecasts, debt covenant analysis, functional area updates, audited half year and full year accounts, dividend discussion papers and ASX briefing packs.
The plaintiff’s expert argued that:
- The information contained in the board packs was not reliable and did not provide a reasonable basis on which to take those decisions,
- Daily cash flows used by the finance team to manage daily and weekly creditor payments ought to have been provided to the board as they provided a more reliable view of the company’s cash flows, including debt facility limit breaches, and
- The value of deferred creditors payments should have been taken into account when evaluating the company’s compliance with its debt facility limits at the relevant times.
Concept of “material prejudice”
Justice Ball’s decision provides clarity on the concept of material prejudice in the context of s254T(c). Key take-aways include:
- The creditors relevant to s254T are creditors existing, or likely to exist, at the time of paying the dividend. Creditors who don’t exist at the time of paying the dividend are protected by the insolvent trading provisions contained in s588G
- The “reduced ability” of a company in paying its creditors includes a material risk that creditors will not be paid at all and a material delay in paying them when those debts are due. This requires an assessment of, and comparison between, the position prior to and after paying the dividend to determine whether creditors are in a worse position
- The practice of deferring creditors is not unusual, with Government research presented as evidence in Court indicating that over 32% of all business payments were made beyond standard 30-day terms. For a breach of s254T(c) to occur, the dividend payment must make the position of the deferred creditors materially worse, both in terms of quantum and the period of delay, and the extent to which deferrals were made with the creditors’ acquiescence.
Reasonable basis for paying dividends
Broadly consistent with the opinions expressed in our reports, Justice Ball concluded that:
- The plaintiff’s expert provided no evidence to support his conclusion that the board pack information was unreliable
- Boards do not have to explicitly consider whether a dividend payment may cause material prejudice to the interests of creditors
- Directors may rely on a company’s audited half-year and full year accounts to the extent they have no cause to believe that the accounts do not present a true and fair view of the company’s financial position and performance
- While variances often occur in cash flow forecasts, the materiality of the discrepancies when taken as a whole, and the board’s understanding of the causes and response thereto are relevant considerations when assessing the reliability of cash flow forecasts
- In circumstances where the payment of a dividend may risk material prejudice to creditors, strategies designed to mitigate that risk, such as those implemented by the company to reduce overstocking and pay down creditors, can be implemented concurrently with decisions to pay a dividend
- Daily cash flows, because of their operational nature, were not documents relevant to the Board’s decision about dividends
- Boards are interested in the changes of debt over time and whether the company remains within its facility limits, notwithstanding that irregular facility breaches may occur with the knowledge and permission of the facility provider. What is important to directors is whether the company is forecast to remain within its debt facility limits at the projected dividend payment date.
Directors - and CFOs in particular - should take particular note of the last two points above. The daily cash flows prepared at the time of the board meeting declaring the final dividend showed that paying the final dividend was projected to cause the Company to breach its debt facility limits (a position not apparent from the monthly cash flow forecasts included in the board pack). Reasonably, the Court took the view that the CFO likely reviewed, was aware of, or ought to have been aware of those daily cash flows and the likely debt facility breach by paying the final dividend. Accordingly, the Court concluded that the CFO breached his duty under s180(1) because the final dividend paper prepared by the CFO did not explain the rationale behind his conclusion that the interests of creditors would not be materially prejudiced by the dividend payment.
Justice Ball also concluded that dividend payments are relevant to the operations of a company and, therefore, the decision to pay a dividend falls within the business judgement rule under s180(2). Therefore, even if the dividend is prohibited by s254T(c), directors will not breach their obligations under s180(2) if:
- The dividend was declared in good faith and for a proper purpose;
- There is a reasonable and appropriate basis for the decision; and
- The directors believe the decision was in the best interests of the company.