Liability for unlawful distributions

This case is concerned with the payment by the Company of a dividend and management charge to its shareholder to offset sums due from the shareholder. The claimant contended that the payments were unlawful distributions and should be repaid in full as there were insufficient distributable profits.

The principles as to the liability of a director for causing a company to pay an unlawful dividend were summarised in Burnden Holdings (UK) Limited v Fielding as:

  1.  Treating directors as if they are trustees of the company’s funds
  2.  If they knew the facts which constituted an unlawful dividend then the directors would be liable for breach of trust, irrespective of whether they knew that the dividend was unlawful
  3. If the directors were unaware of the facts rendering the dividend unlawful and had taken reasonable care in the preparation of the relevant accounts to establish sufficient profits to render the dividend lawful, they would not be personally liable if it turned out that there were in fact insufficient profits
  4. The directors were entitled to rely on the opinion of others, in particular auditors, as to the accuracy of statements appearing in the company’s accounts

In this case distributions were made partly out of distributable profits and partly out of capital. The court concluded that the directors were in breach of their duties in authorising the distribution, but that did not invalidate the whole distribution, only that part which exceeded the amount of the available distributable profits (around £316k of a distribution of £830k).

The shareholder was found liable to repay the distribution and the directors were liable to compensate the company for their breach of duty to the tune of £316k. However, one of the company’s four directors was relieved of liability under s1157 Companies Act 2006 in respect of his breach of duty as:

  • He had no financial or accounting experience and so relied on what he was told
  • The other three directors were the main decision makers so the company would do whatever they decided
  • His role in considering the distribution was very limited
  • He had no later involvement in approving the amount of the management charge or effecting accounting entries.

SSF Realisations Limited (in liquidation) v Loch Fyne Oysters Limited and others [2020] EWHC 3521 (Ch)

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