- When unlawful distributions and insolvency collide (SSF Realisations Ltd (In Liquidation) v Loch Fyne Oysters Ltd)
- What are the practical implications of this case?
- What was the background?
- What did the court decide?
- The management charge did not represent a genuine liability of the company, and was, in fact, a disguised ‘distribution’ within the meaning of CA 2006, s 829
- The October management accounts were the ‘relevant accounts’, but those accounts were not ‘properly prepared’ within the meaning of CA 2006
- Liability of LFO for the distribution
- Liability of the directors for the distribution
- Case details
Restructuring & Insolvency analysis: The case concerned the lawfulness of a distribution made by a company to its sole shareholder under Part 23 of the Companies Act 2006 (CA 2006). The company’s directors had resolved to pay (i) a dividend; and (ii) a ‘management charge’ to its sole shareholder, which, combined, were greater in value than the amount of the company’s distributable reserves. The court held that the ‘management charge’ was in fact a disguised distribution. In those circumstances, and in the light of the fact that the accounts relied upon by the directors to justify the distribution were not properly prepared, the shareholder was liable to repay the sum of £316,859, being the sum which the court was satisfied that the shareholder knew, or had reason to believe, contravened CA 2006, Pt 23. In addition, two of the company’s directors were found to be liable for breach of duty in authorising the distribution and were ordered to compensate the company in the same amount. One director of the company was excused from liability pursuant to CA 2006, s 1157, as he was found to have acted honestly and reasonably. The case contains a helpful summary of the legal principles involved when considering unlawful distributions to shareholders, and the circumstances in which shareholders and directors of a company can find themselves held liable in circumstances where, to their knowledge, a company has insufficient distributable reserves. Written by Alexander Cook, barrister, at 4 Stone Buildings.
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