Burnden Holdings (UK) Ltd v Fielding & Anor

Directors who cause an unlawful dividend are not automatically liable merely because the distribution was unlawful. Liability remains fault-based where the director was unaware of the facts making the dividend unlawful, provided reasonable care was taken to secure proper accounts and the director reasonably relied on competent advisers. A private company’s interim accounts need only enable a reasonable judgment on the statutory matters; their required detail depends on context. In valuing subsidiary investments and intra-group debts, commercial value and future trading prospects may be relevant, rather than a snapshot of net assets. A holding company may remain solvent despite a subsidiary’s insolvency if the subsidiary can continue trading and repay debts with available support. A grant of security for existing indebtedness is not ordinarily a transaction at an undervalue when assessed from the company’s perspective.

The liquidator and Burnden Holdings (UK) Limited claimed against the company’s majority shareholders and directors concerning two 2007 transactions: a distribution in specie of the shares in Vital Energi Utilities Limited as part of a demerger, and a grant of security securing loans made by the defendants.

The claimants alleged that the distribution was unauthorised, unsupported by sufficient distributable profits, made in breach of fiduciary duty, entered into when the company was insolvent or likely to become insolvent, and a transaction defrauding creditors under Insolvency Act 1986. Similar allegations were made concerning the grant of security, together with limitation issues.

The central questions concerned the directors’ liability for unlawful distributions, the adequacy of interim accounts, the commercial valuation of subsidiary assets and debts, solvency, and the application of section 423.

1. Distribution. The distribution was lawful. The directors had determined to recommend it, and the sole shareholder’s unanimous consent could waive the articles’ requirement that the dividend not exceed the directors’ recommendation under the Duomatic principle.
2. The requirements for private-company interim accounts under s.270(4) of the Companies Act 1985 are functional. The accounts must enable a reasonable judgment as to the statutory matters, but their detail and formality depend on the company’s circumstances. Supporting documents may be considered with the accounts. The accounts in this case were sufficient.
3. The court reaffirmed the fault-based approach to directors’ liability stated in Dovey v Cory. A director who knows the facts constituting an unlawful dividend is liable, but a director unaware of those facts is not liable if reasonable care was taken and reliance on competent financial advisers was reasonable. The defendants had reasonably relied on the finance director, auditors, tax advisers and solicitors.
4. The values of subsidiary investments and intra-group debts had to be assessed commercially. Future trading prospects and the likelihood of repayment could be relevant. The evidence did not establish that the company was balance-sheet insolvent after the distribution. Nor was there evidence that the defendants knew, or were alleged to ought to have known, that it was insolvent or likely to become insolvent.
5. The distribution was not made for the purpose of putting assets beyond creditors’ reach under s.423 of the Insolvency Act 1986. Its purposes were business separation, employee incentives and providing support to the remaining group.
6. The grant of security was supported by the commercial benefit of continued lending. Security for existing indebtedness did not involve a transfer of value from the company for the purposes of s.423(1)(a) or (c). The claim was also, if necessary, statute-barred.
7. The claimants’ claims were dismissed.