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26 February 2020

Legal Q&A - Corporate Restructuring and Insolvency

Question:

I am the director of a company that is now in liquidation. The liquidator has told me that I unlawfully declared a dividend to the company’s shareholders prior to the liquidation and that he may look to me to contribute for the company’s loss. I am not a shareholder of the company and did not receive any benefit of the dividend payment. Is he able to recover the dividend sum from me personally?

Answer: 

The liability of a director where a dividend is subsequently found to be unlawful was considered in the case of Re Burnden Holdings (UK) Limited (in liquidation) [2019] EWHC 1566 (Ch). This case held that director liability for unlawful dividends is not strict – ie the court considers whether the director was at fault when he declared the dividend. It was held that directors would not be personally liable in respect of an unlawful dividend payment where, at the time that the dividend was declared, they can show that:

  1. they were not aware that the declaration of the dividend was unlawful

  2. they took reasonable care in preparing the company’s accounts and calculating distributable profits.

Therefore, your knowledge at the time you declared the dividend will be of key importance. In this regard, the court will take into account: whether you knew the payment was unlawful; whether you knew of the facts that evidence the unlawful nature of the payments; and whether you ought to have known of these facts (being a reasonably diligent director).

Further, you will not be liable if you can demonstrate that you took care to ensure that the accounts were accurate and demonstrated the availability of sufficient profits from which to make a dividend payment. The court has acknowledged that a director may rely on professional advice given by others who are carrying out specialist roles. Therefore, it will be relevant whether you employed accountants and/or lawyers to assist you in preparing the company’s accounts and declaring a dividend.

This case has made bringing an unlawful dividend claim against a director significantly more difficult for liquidators
and administrators. In addition to demonstrating that the declaration of the dividend was unlawful, they must also evidence the director’s knowledge of this fact at the time. Therefore, whether the liquidator may be able to recover the dividend from you personally will depend on the specific facts of your case (by reference to the above considerations).

Question:

A creditor of a bankruptcy estate has threatened to apply to court to have an alternative trustee in bankruptcy appointed (and me removed from office) due to alleged misconduct. What would a creditor need to demonstrate in order to be successful in such an application?

Answer:

The removal of a trustee from office is always a difficult topic – not least because the very allegation of misconduct is one that is very personal. A trustee faced with such an allegation will always be concerned that their integrity is being challenged and will (understandably) expend significant time and effort in defending such claims.

The grounds for removal of a trustee has recently been considered in the case of Birdi, Miles & Others v. Price & Others [2019] EWHC 291 (Ch). The court in this case confirmed that the conduct of the trustee will be a material consideration and that it (the court) has very broad powers for removal of a trustee, but ultimately the best interests of the creditors will be key in determining whether the removal of the trustee is appropriate.

The court may therefore look beyond limited instances of misconduct and will instead make reference to the ‘real substantial, honest interests of the process, and to the purpose for which the officeholder is appointed’ (Doffman & Issacs v. Hellard & Wood [2011] EWHC 4008 (Ch)). In the Birdi case, the court (who considered that the applicants had not demonstrated any evidence of misconduct in any event) noted that it was material that the estate was unlikely to make any distribution to creditors and that, accordingly, creditors were unlikely to see any benefit of the replacement of the trustees. 

The creditor will therefore need to evidence more than simply an instance of misconduct. They will need to show a real benefit to the creditors in replacing you as trustee. The court will not remove you from office lightly and, further, will take into account (among the issues set out above), the impact that your removal would have on your professional standing and reputation (see Re Edennote Ltd; Tottenham Hotspur plc & Others v. Ryman & Others [1996] 2 BCLC 389 in this regard).


First published in the Winter 2019 edition of RECOVERY Magazine and reproduced with the permission of R3 and GTI Media.

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