LRH Services Ltd v Trew & Ors

A director assessing solvency must consider all liabilities, including contingent and prospective liabilities, and the assets or arrangements actually available to discharge them. The assessment is realistic and commercial, rather than a worst-case exercise. Voluntary financial support from a related company cannot be treated as available unless the company has an enforceable entitlement to it.

Directors’ statutory duties continue to require consideration of the company’s longer-term interests, even where a solvency statement addresses only the following 12 months. A director may remain responsible for a reorganisation planned while in office, despite resigning before its formal implementation. A director who signs or approves a restructuring without making proper enquiries may be liable for resulting loss.

LRH Services Ltd, acting through its liquidators, claimed that three former directors breached their statutory duties in connection with a 2009 reorganisation. The restructuring transferred LRH’s trading subsidiaries and other assets to a new group, left LRH holding onerous property leases, and supported a substantial dividend and reduction of capital.

The claimant alleged that the directors failed properly to assess LRH’s liabilities and assets, failed to secure reliable sources of income, and acted without proper regard to LRH’s interests. It also challenged the validity of the solvency statement made under the Companies Act 2006. The central issues were the directors’ duties, the proper assessment of contingent and prospective liabilities, responsibility after resignation, and the consequences of an invalid solvency statement.

1. Breaches before and during the reorganisation. The defendants breached their duties under sections 172 and 174 of the Companies Act 2006. The directors were required to consider LRH as a separate company, its continuing liabilities, and whether the assets or enforceable arrangements retained would meet those liabilities.
2. Solvency assessment. Under section 643, contingent and prospective liabilities had to be assessed realistically, by considering their nature, likelihood, timing, available assets and arrangements for meeting them. The directors could not rely on uncommitted support from CSG or other related companies because LRH had no right to compel that support. Reliance on such support meant that the statutory test had not properly been applied.
3. The court accepted that the obligation of Aim Plus to pay the licence fees for three Resourcing properties was enforceable and could be taken into account. The inter-company balance due from CSGH was also a proper asset. By contrast, the directors’ loans were unsupported and had not been effectively novated to LRH, and provision should have been made for Unit 24 and the Poyle exposure.
4. Mr O’Neill remained responsible for foreseeable consequences of the arrangements he planned while a director, despite resigning before the solvency statement and formal distribution. Mr Trew was responsible as the director who made the statement and proceeded with the reorganisation. Mr Brewer was responsible because he signed and approved documents without making any meaningful enquiry.
5. The solvency statement was invalid because Mr Trew had not properly formed the statutory opinions in relation to LRH. The capital reduction and dividend were therefore unlawful. The responsible directors were in principle liable for the assets unlawfully distributed, subject to further determination of quantum and appropriate credit for recoveries.
6. The court found no separate breach of the duty to avoid conflicts of interest. It also held that the creditors’ interests duty had arisen, although that added nothing to the conclusions based on the other breaches. Relief under section 1157 was refused because the directors had not shown that they acted honestly and reasonably.