Burnden Holdings UK Limited (In Liquidation) v Fielding

The claim was a first instance company law claim by a liquidator and the company against Mr and Mrs Fielding challenging two 2007 transactions: (1) a grant of a fixed and floating charge in favour of the Fieldings as security for loans they had advanced to the group; and (2) a demerger/distribution in specie by which BHUK distributed its entire shareholding in Vital. The claimants alleged unlawful distribution (Companies Act 1985, Part VIII and s.270), breach of fiduciary duties (including s.172(3) Companies Act 2006), a transaction defrauding creditors (s.423 Insolvency Act 1986), and that the grant of security lacked proper authority.

Key legal principles applied:

• Directors are treated as fiduciaries in relation to company funds but, as to unlawful distributions, liability requires either knowledge of the facts making the dividend unlawful or fault (the court followed the line of authorities culminating in Dovey v Cory rather than treating liability as automatically strict).
• Section 270(4) 1985 Act requires interim accounts that enable a reasonable judgment to be made; what is necessary depends on context and a non-trading holding company’s interim accounts may be concise yet adequate.
• The Duomatic principle may validate shareholder action where unanimous, and minutes authenticated in accordance with s.249 of the 2006 Act are presumed to be accurate absent proof to the contrary.
• For the balance-sheet insolvency assessment the Eurosail formulation must be applied (look at assets and make proper allowance for prospective and contingent liabilities).

Material grounds for decision:

• The court placed significant weight on the contemporaneous documentary record and professional involvement (Tenon Audit/CF and Addleshaw Goddard). The directors (and the two independent directors) had relied upon the company’s finance officers and professional advisers in relation to the interim accounts and the demerger steps.
• The interim accounts prepared for October 2007 were, on the facts of this case, sufficient to permit a reasonable judgment under s.270(4). Accounting judgments about recoverable amounts of subsidiary investments and intercompany receivables involved matters on which the directors properly relied on specialists; the surviving contemporaneous materials and audit involvement supported the defendants’ position.
• The court accepted that, subject to relief under statute, a director who knowingly causes an unlawful distribution is liable, but it concluded that the proper reading of authority is that liability is fault-based where a director is without knowledge of the facts rendering a distribution unlawful and has taken reasonable care.
• The demerger/distribution was not shown to have been unlawful on the pleaded bases, the defendants did not dishonestly breach s.172(3) Companies Act 2006, and the s.423 claim failed. The grant of security was authorised and commercially beneficial; it was not a transaction at an undervalue within s.423.

Outcome: the claim was dismissed.

The action was brought by BHUK (in liquidation) and its liquidator alleging that two transactions of 2007 were unlawful and/or constituted breaches of fiduciary duty by the Fieldings. The claimed unlawful transactions were: (a) a written debenture and related loan documentation dated 9 July 2007 securing advances by the Fieldings; and (b) a demerger by which BHUK distributed to its shareholders the whole of its shareholding in Vital (the Distribution), effected in October 2007, which was followed by a sale of a 30% share in Vital to SSE for £6m and an injection of £3m to the group.

Nature of relief sought: restitution/recovery from the defendants for unlawful distribution; declarations and recovery under company law and the Insolvency Act 1986 (s.423); and relief in relation to the grant of security as unauthorised or at undervalue.

Issues framed by the court included whether a dividend had in fact been declared at a properly convened board meeting, whether the interim accounts complied with s.270(4) Companies Act 1985, whether directors’ liability for unlawful distributions is strict or fault-based, whether the defendants acted dishonestly and in breach of s.172(3) Companies Act 2006 (by knowing BHUK would be rendered insolvent or likely to become insolvent), whether the Distribution was a transaction at an undervalue under s.423 Insolvency Act 1986, and whether the Grant of Security had lawful authority or was a transaction at an undervalue.

Court’s reasoning (concise):

• The judge emphasised caution in assessing oral recollections and relied chiefly on contemporaneous documents (board minutes, professional correspondence and audit files). Tenon Audit and Tenon CF and Addleshaw Goddard were actively involved contemporaneously; that professional involvement materially informed the court’s assessment of reasonableness.
• On the threshold question of directors’ liability for unlawful dividends, the court analysed historical and modern authorities and concluded the appropriate rule remains that set out by the late 19th/early 20th century line of authorities (including Dovey v Cory): a director who lacks knowledge of the facts making the dividend unlawful will not be personally liable provided reasonable care had been taken to obtain and consider appropriate accounts and advice. The statutory power to grant relief (now s.1157 Companies Act 2006) mitigates consequences but does not itself transform liability to strict liability.
• The court found that the Distribution was approved by the board (or unanimous shareholder action applied by the Duomatic principle), and that the Interim Accounts dated shortly before the Distribution were adequate to enable a reasonable judgment under s.270(4), having regard to the company’s nature as a non-trading holding company and the contemporaneous audit and professional advice process. Alleged mis-descriptions and valuation issues (SGI, TBG, K2 Con, Cestrum and intercompany receivables) were explored; many raised accounting judgments, and the court concluded that the defendants’ reliance on the finance director and professional advisers was reasonable.
• The court rejected the allegation of dishonest breach under s.172(3) because the defendants did not know BHUK was or would be insolvent as a result of the Distribution; on the balance-sheet Eurosail test the claimants had not satisfied the burden of proving insolvency once proper commercial valuation and allowances were made.
• The s.423 claims failed on the facts and as a matter of law (eg a grant of security for pre-existing advances did not by itself constitute a disposition at an undervalue from the company’s point of view as required by relevant authority).
• Finally, the claim as pursued was dismissed in full. The judge also considered remedies and valuation issues (valuing Vital) and addressed time-bar/limitation points in relation to the grant of security claim.

The claim is dismissed. The court held that the Distribution and the Grant of Security were not established to be unlawful or otherwise actionable on the pleaded bases. The directors’ and advisers’ contemporaneous actions, the contents of the Interim Accounts and the involvement of auditors and professional advisers supported the conclusion that directors acted reasonably; the court applied the established test that liability for unlawful distribution requires knowledge of the relevant facts or fault, and found no dishonest breach under s.172(3) or a s.423 transaction at undervalue.