Burnden Holdings (UK) Ltd v Fielding

A liquidator brought claims against former directors for breach of fiduciary duty regarding a distribution in specie and grant of security. The court held that directors' liability for unlawful dividends is fault-based, not strict. The claims were dismissed as the distribution was lawful, interim accounts complied with statutory requirements, and the directors were not at fault.

Facts

Burnden Holdings (UK) Limited (‘BHUK’), a holding company, was placed into administration in October 2008 and later wound up. The liquidator brought claims against Mr and Mrs Fielding, who were majority shareholders and directors of BHUK, alleging breach of fiduciary duty in respect of two transactions effected in 2007: (1) a grant of security in favour of the Fieldings for loans they had made to the company; and (2) a distribution in specie of BHUK’s shareholding in a subsidiary, Vital Energi Utilities Limited, as part of a demerger transaction.

The Group faced severe cash flow difficulties in 2007. The demerger of Vital was structured to inject £3 million into the Group through Mrs Fielding selling 30% of her shares in Vital to Scottish and Southern Energy PLC for £6 million, with half the proceeds being loaned to the Group.

Issues

Distribution Claims

The claimants alleged that: (i) there was no valid declaration of dividend at a properly convened board meeting; (ii) the distribution was unlawful because interim accounts did not enable reasonable judgment to be made as to assets, liabilities, profits and losses, and there were insufficient distributable reserves; (iii) the defendants dishonestly breached their duties under s.172(3) Companies Act 2006 by failing to consider creditors’ interests when BHUK was insolvent; and (iv) the distribution was a transaction defrauding creditors under s.423 Insolvency Act 1986.

Grant of Security Claims

The claimants alleged that the grant of security was unauthorised, conferred no benefit on BHUK, and was a transaction defrauding creditors.

Nature of Directors’ Liability

A central issue was whether directors’ liability for causing an unlawful distribution is strict or fault-based.

Judgment

Strict Liability versus Fault-Based Liability

Zacaroli J undertook a comprehensive review of 19th century and modern authorities on the nature of directors’ liability for unlawful dividends. The judge concluded that liability is fault-based, not strict:

“For the above reasons, I conclude that the law on the issue whether liability is strict or fault-based remains the same as it was at the end of the 19th Century… I consider this to be consistent with first principles, so far as it applies to the payment of unlawful dividends. The question whether there are sufficient distributable profits may turn on fine questions of accounting judgment. Directors are not required to be accountants and the comments of Lord Davey and Lord Halsbury LC in Dovey v Cory as to directors being entitled to rely on the judgment of others whom they appoint to carry out specialist financial roles within the company are as pertinent today as when they were made in 1901.”

Distribution Claims

The court found that: (i) there was a valid determination by directors to recommend the dividend, even if informally reached; (ii) the interim accounts complied with s.270 Companies Act 1985; (iii) the defendants were not at fault in causing the distribution as they reasonably relied on professional advisers; (iv) BHUK was not rendered insolvent by the distribution; and (v) the defendants did not have the proscribed purpose required for a s.423 claim.

Grant of Security Claims

The court found that: (i) the directors validly authorised the grant of security knowing it related to existing lending; (ii) there was commercial benefit to BHUK in securing continued lending; and (iii) the grant of security did not fall within s.423.

Implications

This judgment provides important clarification on directors’ liability for unlawful distributions, resolving an issue left open by the Supreme Court in Paycheck. The decision confirms that directors who act honestly and reasonably in relying on professional advisers when preparing accounts for distributions will not be held strictly liable if those accounts subsequently prove defective. The judgment also provides guidance on the requirements for interim accounts under s.270 Companies Act 1985, the assessment of company solvency for directors’ duties purposes, and the valuation of company assets in insolvency contexts.

Verdict: The claimants’ claims were dismissed in their entirety. The court held that directors’ liability for unlawful dividends is fault-based rather than strict, that the distribution was lawful and properly authorised, that the defendants were not at fault, and that the grant of security claims also failed.

Source: Burnden Holdings (UK) Ltd v Fielding