English Court Provides Guidance On Director Liability For Dividends

SUMMARY

A recent decision of the High Court of Justice in England & Wales in Re Burnden Holdings (UK) Limited (in liquidation) [2019] EWHC 1566 (Ch) ("Burnden Holdings") provides a thorough review of English dividends law, including director liability in particular. It also provides helpful clarity on the scope of liquidator clawback proceedings. The case is relevant to English companies declaring dividends and to directors of English companies concerned about their personal liability, as well as to insolvency practitioners and financial advisers who need to consider the viability of liquidator clawback proceedings. It is also relevant to financial creditors, who, given the prevalence of 'cov-lite' terms, will be well advised to consider a broader purview of claims in their negotiating armoury, over and above their limited contractual rights.

KEY TAKEAWAYS

Directors' fiduciary duties

Even if it is later established that there were insufficient distributable reserves in relation to the declaration of a dividend, director liability for breach of fiduciary duty will be limited where the directors: (1) take reasonable care to ensure the accounts are properly prepared for the purpose of establishing the availability of sufficient profits to render the dividend lawful ('reasonable care' requires provision of full information regarding the company's financial position); (2) seek appropriate specialist accounting and/or legal advice to the effect that there are sufficient reserves; and (3) make a proper record of the relevant facts surrounding the making of the dividend, as well as their reasons for it, in formal board resolutions. As to the sufficiency of distributable reserves, the Court provided guidance on: Misdescription of an asset in the accounts - This will not necessarily mean that the accounts do not enable a reasonable judgment to be made as to the assets, liabilities, profits and losses. The question depends on the accuracy of the ultimate calculation on an aggregate (not individual) basis. Whether a loss constitutes a 'realised loss' - An overstatement of the carrying value of an asset will not necessarily require a realisable loss in respect of that asset. It will depend on all of the circumstances. Directors will be reassured that the insolvency of a subsidiary will not necessarily carry a nil value on the balance sheet of its parent - It requires a broader, commercial assessment of value (as per BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2013] 1 WLR 1408). Liability under section 423 Insolvency Act (IA)

Liability requires that the 'real and substantial purpose' in conducting the transaction must be to put the asset beyond the reach of creditors. Where there are two purposes: one being a valid commercial benefit and the other being a concern about solvency, the Court will consider the evidence when deciding whether the onerous burden of establishing the wrongful purpose has been established. BACKGROUND FACTS AND THE LIQUIDATOR'S CLAIMS AGAINST THE DIRECTORS

Burnden Holdings involved a classic attempt by a liquidator of an English company to clawback property of an insolvent English company for the benefit of its creditors. The clawback proceedings we consider here1 arise from a declaration of a dividend and a distribution in specie (the "Distribution") by Burnden Holdings (UK) Limited (the "Debtor") of a subsidiary ("Vital"). The de-merger was intended to facilitate an employee incentive share plan for employees within the Debtor's group. The plan was considered important for the prospects of Vital. There was evidence that the de-merger was also intended to assist in the face of of cash-flow concerns.

Among other things, the liquidator alleged that: (1) the Distribution was unlawful because of a failure to meet the then-applicable statutory requirements; (2) 'The Distribution was effected by the defendants in dishonest breach of their fiduciary duties under s.172(3) of the Companies Act 2006 (the "2006 Act") because...