Of debts and dividends (LRH Services Ltd v Trew)

Of debts and dividends (LRH Services Ltd v Trew)
The case of LRH Services Ltd (in liquidation) v Trew underlines that a company and its directors must take great care when reviewing information leading to the making of a solvency statement under the Companies Act 2006. Failure to do so has the potential for criminal repercussions and possible personal liability in the future. Rebecca Zaman, of 3 Verulam Buildings, explains a case that offers clarity for insolvency practitioners.
LRH Services Ltd (in liquidation) v Trew and others

 [2018] EWHC 600 (Ch), [2018] All ER (D) 161 (Mar)

What are the practical implications of this case?

Companies, directors and their advisers considering using the solvency statement procedure under section 643 of the Companies Act 2006 (CA 2006) to reduce share capital should be aware of the High Court’s decision in LRH Services Ltd (in liquidation) v Trew and others.

Companies seeking to reduce share capital (in order, for example, to pay out a dividend or as part of a group restructure) may do so using CA 2006, s 643. This provision requires each company director to make a solvency statement, which is a declaration that each director has formed the opinion that, if the capital reduction takes place, there is no ground on which the company would then be unable to pay its debts over the 12-month period following the statement. If a director makes a solvency statement without having reasonable grounds for holding that opinion, that director may face criminal penalties, under CA 2006, s 643(4)–(5). Section 643 does not, however, provide that the solvency statement is itself invalid if a director lacks reasonable grounds for the opinion so long as the director honestly and genuinely formed that opinion. The significance of a solvency statement being invalid is that all actions done pursuant to it, such as the payment out of a dividend, would in turn be invalid and those who carried out those actions would face potential liability,

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About the author:
Eleanor qualified in 1998 into the insolvency team at ASB law. She became a partner in 2005, and went on to head up the Recovery & Insolvency team. Whilst traditionally specialising mainly in contentious corporate insolvency matters, in recent years she has moved into the non contentious arena, in particular specialising in company administrations.