Directors’ duties – distributions and granting security

The company and its liquidator bought an action against majority shareholders and former directors of the Burnden group of companies, in respect of a purported unlawful distribution in specie and the granting of security in favour of the directors. 

The claimants alleged the distribution was unlawful as there were insufficient distributable reserves and further contended that the directors were liable for breach of fiduciary duty and that the distribution was a transaction defrauding creditors under Section 423 of the Insolvency Act 1986.

The High Court dismissed each of the claims against the directors and held that the interim accounts provided sufficient detail.–It also held that directors are not strictly liable for breach of fiduciary duty, and are instead liable if they know or ought reasonably to have known that the relevant distribution was a misapplication of company funds.

On the facts, the Court held that the directors had taken reasonable care in securing the preparation of interim accounts and it was reasonable for them to conclude, from those accounts and on the financial and legal advice they had received, that there were sufficient distributable reserves to enable the distribution to be made.

Whilst the Court held that an unlawful distribution could be a transaction defrauding creditors.  It found that this was not the case here as the distribution was principally driven by a reasonable commercial need to separate the business of one company from other group companies.

The High Court held that the chargor received consideration by way of a facility agreement repayable over a two-year period in respect of loans that would otherwise be repayable on demand and the granting of security was not therefore a transaction defrauding creditors.

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