Directors’ Liability For Unlawful Dividends

The topical question of directors’ liability for payment of unlawful dividends continues to be controversial with conflicting decisions and views to whether the liability should be strict or fault-based. The most recent High Court decision of Burnden Holdings (UK) Limited v Fielding [2019] EWHC 1566 (Ch) will therefore be of interest to directors, insolvency officeholders and auditors alike.

The case addressed the question of whether directors had any liability for dividends which had been declared based on incorrect accounts where the directors were unaware of the relevant facts.

A distribution made other than in accordance with the relevant provisions of the Companies Act 2006 is unlawful. Whilst the Act explicitly provides a right for the company to seek repayment from a shareholder in circumstances where the shareholder knew or had reasonable grounds for believing the distribution was unlawful, it is silent on the explicit question of directors’ liability in those circumstances and there have been conflicting decisions on when directors should be held to be liable.

Case details

In Burnden, it was argued by the company and its liquidator that certain assets had been over-valued or mis-described in the accounts with the result that dividends paid to the husband and wife majority shareholders, both of whom were also directors, were unlawful. It was further argued that as directors the couple were personally liable for distributing the company’s assets in breach of the Act.

Mr Justice Zacaroli provided a very useful review of the case law which has built up over the last 150 years and held that on the facts the couple were not liable in their capacity as directors because they were not at fault in that they had taken reasonable care, including by appointing and relying upon appropriate professionals (accountancy advisers and the company’s finance director) when securing the preparation of the accounts and calculating distributable profits.

Comment

The take away from this case is that bringing claims against directors will inevitably be more difficult because of the need to establish fault on their part. It may in turn divert more attention to any professional preparing the accounts.

How Nelsons can help

Cathryn Selby is a Partner in our Dispute Resolution team, specialising in commercial litigation and professional negligence claims.

If you would like further advice in relation to the subjects in this article, please contact Cathryn or another member of our expert Dispute Resolution team in DerbyLeicester or Nottingham on 0800 024 1976 or via our online form.