Revisiting over 150 years of case law, the High Court has resolved a question on which both the courts and textbooks had given conflicting answers: is a director’s liability for payment of a dividend which is unlawful as a result of incorrect accounts fault-based or strict? Going against what appeared to be the established wisdom, the High Court has recently concluded that liability is fault-based – directors will only be liable where they knew of the facts which constituted an unlawful dividend, although it is unnecessary for the claimant company or insolvency officeholder to prove that the directors knew that those facts made the dividend unlawful: Burnden Holdings (UK) Ltd v Fielding [2019] EWHC 1566 (Ch).

Where directors are unaware of the relevant facts, the High Court has held that the directors will not be liable provided that they had taken reasonable care to secure the preparation of accounts and calculation of distributable profits which would support the amount of the dividend, including by relying on appropriately skilled professionals.

For companies and (more likely) insolvency officeholders bringing claims against the directors of a company, the practical impact is likely to be twofold:

  • They will likely have to gather and deploy evidence not only in relation to the inaccuracy of the relevant accounts but also the directors’ knowledge of the facts which gave rise to those inaccuracies (for example, that an asset was wrongly valued). Together with the difficulties often experienced by insolvency officeholders in piecing together the documentary and other records of a company, the evidential requirements may increase the costs of unlawful dividend claims.
  • A claimant’s focus may shift towards the professionals, likely auditors, on whom directors relied when preparing the relevant accounts. In recent years, auditors have faced increased regulatory scrutiny upon high-profile insolvencies but the extent of their liability to the company, if any, is largely untested in the case law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.