Court of Appeal clarifies scope of transactions at an undervalue: TAQA Bratani v Fujairah

In TAQA Bratani Ltd & Ors v Fujairah Oil and Gas UK LLC & Ors [2025] EWCA Civ 1669, the Court of Appeal clarified the correct approach for identifying a ‘transaction’ for the purposes of section 238 of the Insolvency Act 1986 and the scope of the defence in section 238(5). This is an important decision for the oil and gas industry and more generally for practitioners advising on the payment of dividends to connected companies in group reorganisations.

Key takeaways

• To bring a claim under section 238 of the IA 1986, the company must have entered into the relevant transaction itself. A corporate group’s wider commercial arrangements should not be conflated with the transactions of the insolvent entity.
• The section 238(5) defence will only apply where the company in question believed the transaction it entered into itself would benefit it. The benefit must be to the company itself, not to its parent, shareholders, or the wider group.
• A large dividend stripping value from a company shortly before its insolvency is inherently suspect and likely to fall foul of section 238. It is also unlikely to ever satisfy the section 238(5) defence, The Court of Appeal emphasised in the judgment that it will be rare for an insolvent company to have reasonable grounds to believe a value-extracting dividend benefits it. The inquiry about the benefit of the transaction must also be viewed through the eyes of the insolvent entity, not through the lens of the wider group.
• Consideration under section 238 must be something the company bargains for or receives in exchange for the transaction. This point was central to why the pension write-off (which benefitted RockRose’s structuring exercise, not UKCS8) could not be counted as consideration for the dividend.
• The purpose of section 238 is to protect creditors from transactions which deplete the insolvent estate to the detriment of creditors. The payment of a large dividend to a parent company on the eve of insolvency is precisely the kind of transaction that the legislation was designed to unwind. As such, making such payments is a high-risk strategy.

Background

The case concerned a group operating in the oil and gas industry. UKCS8 (a Delaware company), TAQA Bratani, and other joint venture parties were involved in decommissioning projects in the North Sea’s Brae oil and gas fields. Under decommissioning agreements, they were required to make annual security payments. Following a group restructuring (in which UKCS8’s parent company, RockRose, was acquired via share acquisition by the Viaro group), UKCS8 failed to make a security payment. RockRose entered a share purchase agreement (SPA) to sell its membership interest in UKCS8 to FIOGC, a Fujairah state-owned company, for US$1.

The High Court accepted that Rockrose and the other defendants (which included the Viaro group and its director, Mr Mazzagatti) believed the sale was in the best interests of UKCS8. Under the SPA, it was agreed that UKCS8 would waive its rights to receive any amounts (through loans, intra-group payments or otherwise) on completion. After signature but before completion of the SPA, Mr Mazzagatti learned that RockRose owed US$84.7 million to UKCS8. As this was an ‘intra-group’ payment, he instructed his team to extinguish this balance, seeing no reason why he should effectively ‘gift’ FIOGC an additional $84 million. The mechanism chosen to ‘waive’ this intra-group payment (in compliance with the SPA) was for UKCS8 to declare a dividend, extinguishing the entire $84.7 million receivable on the day of completion. The same day, RockRose also wrote off US$53.7 million owed to it by UKCS9 (another group company) relating to a pension buy‑out.

Ultimately, the parties could not reach agreement over UKCS8’s failure to make the earlier payment and UKCS8’s Brae interest was forfeited by TAQA and others. UKCS8 was later wound up, and the liquidators assigned to the claimants the right to bring a claim under section 238 of the Insolvency Act 1986 (IA 1986) (transactions at an undervalue) in respect of the dividend. The recent appeal only concerned the section 238 claim, although other potential claims (such as unlawful means conspiracy and a claim pursuant to section 423 of the IA 1986) had been identified.

The law on transactions at an undervalue (section 238 of the IA 1986)

Section 238 of the IA 1986 allows an officeholder to challenge a transaction entered into with a person at a ‘relevant time’ before insolvency, if it was at an undervalue. The ‘relevant time’ is defined in section 240(1)(a) of the IA 1986 as the period of two years ending with the onset of insolvency.

Transactions at an undervalue also have an insolvency requirement. The company must have been unable to pay its debts at the time of the transaction or become unable to pay its debts as a result of the transaction. In this case, the High Court found that UKCS8 was balance sheet insolvent on the date the dividend was declared. No appeal was brought against that finding. As such, the Court of Appeal proceeded on the basis that the insolvency requirement was met. Section 238(4) provides that a company enters into a transaction at an undervalue if:

• it makes a gift or otherwise enters into a transaction with a person on terms that provide for it to receive no consideration; or
• it enters into a transaction with a person for a consideration of value of which, in money or money’s worth, is significantly less than the value of the consideration provided by the company.

The Court of Appeal established in BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112 that dividends are capable of constituting a ‘transaction’ within the scope of section 238 of the IA 1986, as well as section 423 of the IA 1986. The underlying objective of section 238 is to prevent depletion of the insolvent estate, protect creditors collectively, and ensure that value-stripping transactions can be reversed.

However, the provision is not fault‑based and does not require an intention to put assets out of reach or prejudice the interests of creditors (unlike section 423).

The statutory defence under section 238(5)

Section 238(5) of the IA 1986 deals with the statutory defence for transactions at an undervalue. Section 238(5) states that the court will not make an order to set aside a transaction at an undervalue if the company:

• entered into the transaction in good faith;
• for the purpose of carrying on its business; and
• at the time, there were reasonable grounds for believing the transaction would benefit the company.

The defence is cumulative and all elements must be satisfied. Importantly, the test under (b) and (c) must be assessed from the perspective of the company itself, not its shareholders or group.

The High Court’s decision dismissing the section 238 claim

In this case, at first instance, the High Court dismissed the claim under section 238 on the basis that although there was a transaction at an undervalue, the statutory defence in section 238(5) applied. In particular, it found that:

• The payment of a dividend by UKCS8 formed part of the overall arrangement under which UKCS8 was sold to FIOGC and the overall sale arrangement was the relevant ‘transaction’ for the purpose of section 238 of the IA 1986. In particular, the High Court accepted the defendants’ submission that the relevant transaction was: ‘the overall arrangement by which UKCS8 was sold to FIOGC … including all the linked steps … to ensure the company was sold free of cash and debt, including the declaration of the dividend’.
• The dividend was an inextricable part of the overall sale arrangement and a necessary mechanism to give effect to the SPA, which ultimately benefited UKCS8 as a member of the group.
• The entire value of the pension write‑off should be treated as consideration received by UKCS8 for the purpose of assessing whether the dividend was a transaction at an undervalue.
• The sale was undertaken in good faith and motivated by a genuine commercial purpose (in particular, it was intended to break deadlock with TAQA, improve UKCS8’s relationship with its partners and ensure it had the backing of a solvent state-owned buyer).

The Court of Appeal’s analysis

The claimants appealed the High Court’s decision. Permission to appeal was granted on three grounds. The key questions for the Court of Appeal were as follows:

1. What is the relevant ‘transaction’ for the purpose of section 238 of the IA 1986?
2. When is the section 238(5) defence available?
3. Was the pension write‑off correctly treated as consideration received by UKCS8 for the dividend?

In granting the appeal in full, the Court of Appeal reached the following conclusions:

The relevant transaction

The Court of Appeal found that the High Court had applied the wrong ‘transaction’ for the purpose of section 238 of the IA 1986. The relevant transaction must be ‘entered into’ by the insolvent company itself. UKCS8 did not enter into the SPA and was not a party to the overall sale arrangement. As such, UKCS8 could not be said to ‘enter into’ the overall sale arrangement.

The finding that section 238 only applies to a transaction that the company itself enters into flows from the statutory wording and the Court of Appeal’s reasoning in Re Ovenden Colbert Printers [2013] EWCA Civ 1408). In reaching that conclusion, the Court of Appeal held that at first instance, the High Court had misapplied the rationale of Feakins v Department for Environment Food and Rural Affairs [2005] EWCA Civ 1513). That authority relates to a debtor arranging a transaction to which it is a party, it does not mean that all commercially linked events can be amalgamated into a single transaction. The debtor must still have entered into the relevant arrangement. Accordingly, properly analysed the dividend was a distinct, discrete transaction entered into by UKCS8 causing an asset (the receivable) to be extinguished without consideration. Thus, the dividend alone was the ‘transaction’ to be considered for the purpose of section 238.

Why the section 238(5) defence was not available

The Court of Appeal found that by identifying the wrong ‘transaction’, the High Court had distorted the section 238(5) defence and reached the wrong conclusion that the defence applied. The Court of Appeal held that none of the three, cumulative elements of the section 238(5) defence were satisfied when applied to the correct transaction. When the good faith test was applied to the dividend transaction alone, it was clear that the dividend conferred no conceivable benefit on UKCS8, it had stripped US$84.7 million in value from UKCS8 and any supposed benefits arose from the SPA (an agreement that UKCS8 was not a party to), rather than the dividend itself.

The Court of Appeal also concluded that the dividend was driven by RockRose’s commercial interests and the wider group level objectives, rather than a benefit to UKCS8.

The pension write-off was not consideration for the dividend

The Court of Appeal also found that the High Court’s treatment of the pension write-off was wrong. Although not central to the outcome of the appeal, the Court of Appeal held that there was no evidence UKCS8 declared the dividend in return for the pension write-off. These were separate steps taken for RockRose’s group structuring purposes. The full US$84.7 million was therefore the undervalue.

Conclusion

This is an important Court of Appeal decision for officeholders or assignees dealing with section 238 claims. It clarifies the meaning of a ‘transaction’ and the scope of the section 238(5) defence. The decision should also serve as a warning for directors involved in group company decisions. It is clear from this decision that companies cannot rely on group-level commercial logic to justify the extraction of value from a subsidiary by way of dividends before a sale or a group restructuring. The decision reaffirms the need for directors of subsidiary companies to make decisions based solely on the interests of the company in question, rather than the interests of the wider group, especially as insolvency approaches.

This article was first published in the April 2026 Edition of Corporate Rescue and Insolvency.