SSF Realisations Ltd v Loch Fyne Oysters Ltd & Ors

A payment by a company to its shareholder is characterised by its substance, not its description. Where the company had no express or implied obligation to reimburse historic services or benefits supplied by the shareholder, a later assumption of liability to pay for them is a voluntary distribution.

Whether a distribution contravenes Part 23 of the Companies Act 2006 is determined objectively by reference to the statutory relevant accounts. Directors may be liable for the part of a distribution made out of capital, rather than necessarily for the whole payment. A director must not authorise an uncertain distribution without ensuring that it will be covered by distributable profits and must maintain sufficient knowledge of the company’s affairs to discharge that responsibility.

The claimant company, formerly trading as Simson’s Fisheries, was wholly owned by Loch Fyne Oysters Ltd. In November 2011 the directors approved an interim dividend and an alleged management charge intended to eliminate the inter-company debt owed by Loch Fyne to the claimant.

The liquidators claimed that the management charge was a disguised distribution and that, together with the dividend, it contravened Part 23 of the Companies Act 2006. They also claimed repayment from Loch Fyne and compensation from the directors. The central issues were the proper characterisation and amount of the distribution, the relevant accounts, and the liability and possible relief of the shareholder and directors.

1. Characterisation. The court found that the directors approved a dividend of £500,000 and a management charge which was intended to eliminate the balance of the debt owed by Loch Fyne. Under s.829 of the Companies Act 2006, the charge was a distribution. Before the board meeting there had been no express or implied agreement requiring the claimant to reimburse Loch Fyne for staff, transport, accommodation or discounted goods. The subsequent assumption of liability was therefore for no legal consideration and was, in substance, a voluntary distribution to the shareholder.
2. Amount and unlawfulness. The final amount of the distribution was £744,916, comprising the dividend and the management charge ultimately offset against the inter-company debt. Under ss.830, 836, 837 and 838, the question whether Part 23 was contravened was objective and depended on the relevant accounts. The 2010 annual accounts could not justify the distribution. The October 2011 management accounts disclosed only £605,720 of distributable profits and were insufficient in any event. They also understated liabilities and overstated distributable profits by about £178,000, so that the profits which should have been stated were £428,057. The distribution was unlawful to the extent of £316,859.
3. Shareholder liability. The knowledge of the relevant directors was imputed to Loch Fyne. It knew, or had reasonable grounds for believing, that the distribution contravened Part 23 to the extent that it exceeded the available distributable profits. Under s.847, Loch Fyne was liable to repay £316,859.
4. Directors’ liability. The directors were liable for the part of the distribution made out of capital. They knew the facts which made the management charge a voluntary distribution and authorised an uncertain distribution without ensuring that it was covered by distributable profits. The directors’ duties included the duty to act in the interests of the company and, in the circumstances, its creditors. Overall responsibility could not be delegated. Mr Lucas’s lack of expertise did not remove his breach of duty.
5. Relief. Mr Craig and Mr Davidson were not entitled to relief under s.1157. Mr Lucas was relieved from liability because of his limited involvement, lack of expertise, absence from the preparatory discussions, and reliance on the other directors.