When are directors liable for distributions?—(Burnden Holdings (UK) Limited (in liquidation) v Fielding)

When are directors liable for distributions?—(Burnden Holdings (UK) Limited (in liquidation) v Fielding)

In the long-running proceedings Burnden Holdings (UK) Limited (in liquidation) v Fielding, the High Court has dismissed all claims. The case had been brought by Burnden Holdings (UK) (BHUK) and its liquidator against two former directors, Mr and Mrs Fielding, who were accused of dishonestly breaching their fiduciary duty as directors. James Potts QC and Matthew Parfitt of Erskine Chambers acted for the defendants in the case and comment the significance of the case.

Burnden Holdings (UK) Limited (in liquidation) v Fielding  [2019] EWHC 1566 (Ch)

What are the practical implications of this case?

This case provides important guidance for practitioners advising directors on the payment of dividends or the grant of security, and for litigators (particularly in an insolvency context) reviewing such transactions with a view to bringing proceedings against the directors.

The court summarised the circumstances in which a director would be liable for the payment of an unlawful dividend, holding such liability was fault-based rather than strict. It was also held that a grant of security is not susceptible to challenge as a transaction at an undervalue or a transaction defrauding creditors under sections 238 and 423 of the Insolvency Act 1986 (IA 1986).

Fault-based liability means that if directors were unaware of the facts which rendered a dividend unlawful, then provided they had taken reasonable care to secure the preparation of accounts which showed that a lawful dividend could be paid, they would not be personally liable if it turned out that in fact there were insufficient profits lawfully to declare a dividend. Directors are entitled to rely on the expertise of others, such as accountants and lawyers.

What was the background?

The litigation related to two transactions. Chronologically, the first was the grant of security by BHUK to the defendants in July 2007, in relation to lending to the group. That was challenged as a dishonest breach of duty by the directors, and also as a transaction defrauding creditors under IA 1986, s 423.

The second transaction was a corpora

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About the author:

Zahra started working as a paralegal at Lexis Nexis in Banking and Insolvency teams in April 2019. Zahra graduated with a 2.1 honours in a BA French and Spanish, completed the GDL at BPP University and is seeking some experience before commencing the LPC. She has undertaken voluntary work for law firms in London, Argentina and Colombia.