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On 19 June 2019, the High Court handed down a wide-ranging judgment concluding the lengthy proceedings brought by Burnden Holdings (UK) Ltd (“BHUK”) and its liquidator against two former directors, Mr and Mrs Fielding, in relation to a distribution in specie by BHUK and the grant of security in their favour.

The Court dismissed all of the claims including allegations that the distribution in specie was unlawful, that it involved a dishonest breach of fiduciary duty and was a transaction defrauding creditors.

The Court also considered whether directors’ liability  for unlawful distributions was strict or fault based, the statutory requirements for interim accounts, the duty to consider the interests of creditors in an insolvency situation, the application of the Eurosail insolvency test,  and whether a grant of security can be a transaction defrauding creditors.

The litigation dates back to 2013. The underlying transactions occurred in 2007. The defendants made a summary judgment application on limitation grounds, which had succeeded at first instance, but was overturned in the Court of Appeal and the Supreme Court. The Supreme Court decision clarified and significantly limited the extent to which directors of companies can rely on the Limitation Act 1980.

The High Court has now delivered an important decision on the substance of the claims.

The litigation related to two transactions. Chronologically, the first was the grant of security by BHUK to the defendants in July 2007 in relation to lending to the group. That was challenged as a dishonest breach of duty by the directors, and also as a transaction defrauding creditors under section 423 of the Insolvency Act 1986.

The second transaction was a corporate reconstruction which took place shortly thereafter in October 2007 and which demerged BHUK’s business into separate groups, one of which was involved in conservatories and double glazing, and the other in consultancy in the combined heat and power sector (the “Demerger”). The Demerger involved a distribution in specie by BHUK of its shareholding in a subsidiary called Vital.

The distribution was attacked on numerous grounds, the most significant of which were allegations that it was an unlawful dividend in contravention of the provisions of the Companies Act 1985, a dishonest breach of duty by the defendants in failing to consider the interests of BHUK’s creditors, and a transaction defrauding creditors under section 423 of the Insolvency Act 1986.

BHUK went into administration around a year after the impugned transactions, and into liquidation one year later.

In a wide-ranging judgment dismissing each of the claims against the defendants, Mr Justice Zacaroli gave important rulings on many legal issues of interest to corporate and restructuring lawyers:

• The Judge held that directors’ liability in respect of an unlawful dividend is fault-based rather than strict, reviewing the cases on the issue going back over the course of 150 years (including recent Supreme Court decisions) and following the decision of the House of Lords in Dovey v Corey [1901] AC 477. He held that if directors were unaware of the facts which rendered a dividend unlawful, then provided they had taken reasonable care to secure the preparation of accounts which showed that a lawful dividend could be paid, they would not be personally liable if it turned out that in fact there were insufficient profits lawfully to declare a dividend. A director would be liable if (i) he actually knew the dividend was unlawful (whether or not that actual knowledge amounted to fraud), (ii) he knew the facts which established the impropriety of the payments even though he was unaware that such impropriety rendered the payment unlawful; (iii) he must be taken in all the circumstances to have known all the facts which rendered the payment unlawful; or (iv) he ought to have known, as a reasonably competent and diligent director, that the payments were unlawful.

• The Judge also considered the statutory requirements in relation to distributions, including both the procedural steps to declare a distribution (including the application of the Duomatic principle) and what is required to constitute “interim accounts” under the Companies Acts. In particular, he considered the effect of a mis-description of an asset in a company’s accounts.

• Despite finding that the Company’s investment in one of its subsidiary had a value less than that identified in the Interim Accounts, he held that there had been no obligation to impair its carrying value in the Interim Accounts. The effect of section 275 of the Companies Act 1985 (section 841 of the 2006 Act) was that no realised loss was created so long as the aggregate value of the company’s fixed assets was not less than the aggregate amount at which they were stated in the books, even if the fixed asset had been written down.

• The Judge considered the duty to consider the interests of creditors, recently confirmed by the Court of Appeal in BTI v Sequana. In particular, he applied the balance sheet test of insolvency set out in Eurosail to the context of a group of trading companies, including the proper assessment of contingent and prospective liabilities and the effect on a parent of an insolvent subsidiary.

• Although he rejected the allegations of breach of duty against the directors, the Judge considered whether he would have given them relief (had they been found liable) under section 1157 of the Companies Act 2006. The Judge held that the discretion was not fettered, even where the company was insolvent and the director was the recipient of the unlawful dividend, noting that this would depend upon matters such as the causal link between the dividend and prejudice to creditors (including whether the distribution could lawfully have been made), the length of time between the dividend and the action being commenced and whether the director retained the benefit of the dividend.

• As regards the s.423 claims, the Judge discussed the threshold and whose intention was relevant in determining whether the purpose was to put assets beyond the reach of creditors.

• The Judge also determined that a grant of security cannot be a transaction defrauding creditors under section 423 of the Insolvency Act 1986, re-establishing the orthodoxy in Re MC Bacon [1990] BCC 78 and not applying the obiter dicta in Hill v Spread Trustee [2007] 1 WLR 2404.

• The Judge considered the application of the Limitation Act 1980 to claims under section 423 of the Insolvency Act 1986 and the circumstances in which 6 or 12 year limitation periods will apply. He held that, given that the relief being claimed was for a sum of money, the claims relating to security under s. 423 were time-barred.

James Potts QC and Matthew Parfitt represented the successful defendants,

They were instructed by Addleshaw Goddard LLP.

James Potts KC
Matthew Parfitt