LRH Services Ltd v Trew & Ors

The liquidators of LRH brought claims against three former directors for breaches of directors' duties arising from a 23 September 2009 group reorganisation and a subsequent distribution. The court applied the Companies Act 2006 duties, notably the requirements for a solvency statement under s 643 and the statutory duties in ss 172, 174 and 175. The judge found the directors (Trew, O'Neill and Brewer) had failed to take adequate steps to ensure LRH had sufficient assets or secure income to meet lease liabilities, had relied on unsecured third‑party support, and (in the case of the solvency statement) formed opinions without taking proper account of contingent and prospective liabilities. The solvency statement was held invalid for want of proper consideration of LRH's position, the capital reduction and dividend based on it were unlawful, and the directors were liable to account for assets paid away. The court refused relief under s 1157 for the directors on the facts.

Background and parties:

• The claimant was LRH Services Ltd, acting by its liquidators, seeking to recover losses said to arise from a corporate reorganisation of 23 September 2009. The defendants were three former directors: Mr Raymond Trew, Mr Derek O'Neill and Mr Jason Brewer.
• LRH was a holding company of operating subsidiaries (Resourcing and Engineering) and the owner/tenant of several commercial properties. The reorganisation transferred trading businesses to a new holding company, Aim Plus Ltd, novated intercompany balances away and left LRH with primarily leasehold liabilities and a small capital base; a dividend of approximately £21.3m was paid to the parent following a solvency statement delivered under Companies Act 2006 s 643.

Nature of the claim and relief sought:

• The liquidators alleged breaches of the directors' duties of care, skill and diligence and the duty to promote the success of the company (ss 174 and 172) in devising and implementing the reorganisation, and in failing to protect LRH afterwards. They also contended the solvency statement lacked reasonable grounds and that the capital reduction/dividend was unlawful; remedy sought included recovery of the unlawful distribution and other losses caused by the breaches.

Issues framed by the court:

Whether the directors had sufficiently taken into account LRH's contingent and prospective liabilities (notably onerous lease exposures) when forming the opinions in the solvency statement required by s 643;

Whether the directors breached statutory duties (ss 172, 174, 175) in planning and implementing the reconstruction and in post‑reorganisation conduct;

Whether the solvency statement was invalid and the dividend therefore unlawful;

Whether discretionary relief under s 1157 (Companies Act 2006) should be granted to the directors.

Court's reasoning and findings:

• The judge reviewed the legal test for s 643, citing authority (including BAT Industries Plc v Sequana and BNY/Eurosail) and explained that directors must take contingent and prospective liabilities into account in a realistic, commercial way and must consider what assets or arrangements will be available to meet them.
• On the evidence and credibility findings, the judge concluded the directors had not made adequate enquiries about material matters: the financial position of LCF (the occupier whose payments were central to meeting LRH's Poyle rent liabilities), the security and enforceability of contractual arrangements said to secure licence/rent payments, the undocumented 'directors' loan' of £150,000 included as an asset, and the exposure under other leases (notably Unit 24). The judge found that reasonable enquiries would have shown the need for materially greater provision for lease liabilities and that reliance on voluntary support from related companies (CSG/CSGH) was improper as if used to justify the solvency opinion it did not create an asset of LRH.
• The solvency statement was held invalid on the pleaded case because the directors did not properly take LRH's contingent and prospective liabilities into account and in practice relied on third‑party support to which LRH had no entitlement. The resulting capital reduction and dividend were therefore unlawful and the responsible directors were liable to account for the assets paid away. The judge also found express breaches of duty of care and of the duty to promote the company's success by each defendant on the facts.
• The court declined to grant relief under s 1157, finding the directors had not acted honestly and reasonably on the evidence and that there were no satisfactory grounds for relief.

Procedural posture:

First instance High Court (Chancery) determination by HHJ David Cooke; further hearing listed for quantification questions.

First instance: The claim succeeds. The judge held that the three directors were in breach of statutory duties (notably ss 174 and 172 Companies Act 2006) in the planning and implementation of the 2009 reorganisation and in post‑reorganisation conduct; the solvency statement under s 643 Companies Act 2006 was invalid on the pleaded case because contingent and prospective liabilities were not properly taken into account and reliance was placed on unsecured third‑party support; the capital reduction and dividend made pursuant to it were unlawful and the responsible directors are liable to account for assets paid away. The court refused discretionary relief under s 1157.