UK: England and Wales: directors' liability for unlawful dividends

Judgment was given last week in Burnden Holdings (UK) Ltd v Fielding & Anor [2019] EWHC 1566 (Ch). This is an important first instance decision concerning insolvency and company law.

Of particular interest is the consideration of whether the liability of directors for the making of an unlawful distribution is strict or fault based. The trial judge, Mr Justice Zacaroli, held that liability was fault based. He stated that if directors were unaware of facts that rendered a dividend unlawful, they would not be personally liable if they had taken reasonable care to secure the preparation of accounts to establish the availability of sufficient profits to render the dividend lawful. If there were, in fact, insufficient profits, the directors would not be liable in such circumstances.

In reaching the position, Zacaroli J. commented on what is expected of directors in terms of their knowledge of accounting and their reliance on others. He stated:

"Directors are not required to be accountants and the comments of Lord Davey and Lord Halsbury LC in Dovey v Cory [[1901] AC 477] 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. The only modification to the position reached at the end of the 19th Century is as to the standard required of directors, which is as set out by Nelson J in [Bairstow v Queen's Moat Houses plc [2000] BCC 1025]."