Burnden Holdings (UK) Ltd & Anor v Fielding & Anor

The claim concerned allegations that directors caused an unlawful distribution in specie of shares (the Vital shareholding) and the grant of security while the holding company was insolvent or of doubtful solvency, and related claims under s.423 Insolvency Act 1986 and limitation provisions in the Limitation Act 1980. The claimants applied for summary judgment and an interim payment on the basis that (i) the company was insolvent or of doubtful solvency when the distribution was made and (ii) the interim accounts relied on did not qualify under s.270(4) Companies Act 1985 and therefore the distribution contravened s.263 of that Act. The court dismissed the summary judgment application because the defendants had real prospects of defending both limbs: there were arguable explanations for the structure of the transaction (including a demerger and tax issues) and factual/resolution issues about the adequacy and effect of the interim accounts, including the treatment of an item relating to SGI Tooling. The court granted the defendants' application for security for costs, ordered that the claimants propose adverse costs insurance or a funder indemnity (or provide cash security if that proves unreliable), and ordered the claimants to pay the defendants' costs of the interlocutory applications with an interim payment on account.

Background and parties: The first claimant, Burnden Holdings (UK) Ltd (in liquidation), and its liquidator brought claims against two former directors and principal shareholders, the Fieldings. The core complaint was that in October 2007 the company distributed the entire issued share capital of a valuable subsidiary (Vital) by way of a distribution in specie and that, in July 2007, the company had granted the defendants fixed and floating charges. The claimants alleged breaches of directors' duties, unlawful distribution contrary to s.263 Companies Act 1985, transactions defrauding creditors under s.423 Insolvency Act 1986, and limitation points under the Limitation Act 1980.

Procedural posture and relief sought: The claimants sought summary judgment and an interim payment of £10.48 million plus interest on the basis that there were no real prospects of the defendants defending the two issues (insolvency/doubtful solvency and invalid interim accounts under s.270(4)). The defendants sought security for costs under the CPR, relying on the claimant company's insolvency and the prospect they could not recover costs if successful.

Issues for decision:

• whether, on the material, the company was insolvent or of doubtful solvency at the time of the distribution such that the directors should have had regard to creditors' interests;
• whether the management/interim accounts relied upon met the statutory requirement in s.270(4) of the Companies Act 1985 so as to permit the distribution under s.263;
• whether relief under s.1157 Companies Act 2006 could be available to the directors if a distribution was unlawful; and
• whether security for costs should be ordered given the first claimant's insolvency and other circumstances.

Court's reasoning and result: The judge found that summary judgment was inappropriate because the defendants had real and arguable defences on both principal issues. There were disputed and fact-sensitive questions (including about the proper characterisation of a £250,000 item attributed to SGI Tooling, the context and authenticity of board minutes, alternative routes to realise value and tax/demerger considerations) that could not be resolved on interlocutory papers. Further, even if interim accounts were defective, relief under s.1157 could be fact-specific and potentially available. By contrast, the court accepted there were changed circumstances and a real prospect the defendants would not recover costs if ordered to pay; accordingly the defendants' application for security for costs succeeded. The court ordered the claimants to provide adverse costs insurance or a funder indemnity (or cash security if the insurer/funder could not be relied on), made directions for expert accountancy evidence limited to solvency and the interim accounts question, fixed a trial window and ordered that the claimants pay the defendants' costs of the interlocutory applications with an interim payment on account.

The claimants' application for summary judgment (and interim payment) was dismissed because there were real prospects of defence on both the alleged doubtful insolvency and the validity of the interim accounts under s.270(4) Companies Act 1985; the defendants' application for security for costs was allowed because the claimant company is in insolvent liquidation and, having regard to the circumstances, it was just to order security (insurance or funder indemnity, or cash if necessary). The claimants were ordered to pay the defendants' costs of the interlocutory applications and an interim payment on account of costs was ordered.

The judgment records earlier interlocutory rulings. The Vice-Chancellor (Norris J) refused an earlier application for security for costs ([2014] EWHC 1908 (Ch)) and the court had previously granted summary judgment against the first claimant on limitation grounds which was set aside by the Court of Appeal ([2016] EWCA Civ 557; reported [2017] 1 WLR 39). The defendants obtained permission to appeal the Court of Appeal decision to the Supreme Court (appeal listed for December 2017).