Solvency statement: breach of directors’ duties results in personal liability

25 May 2018

Three company directors were found to have acted in breach of duty, and thus have assumed personal liability in connection with a reorganisation which left the company unable to meet its own liabilities without the assistance of its subsidiaries in LHR Services Ltd (in Liquidation) v Raymond Arthur Trew, Jason Marcus Brewer, Derek O’Neill.

As part of the reorganisation, one of the directors had signed a solvency statement that the company had sufficient assets to meet its liabilities over the next 12 months pursuant to section 634 Companies Act 2006, before declaring a dividend and reducing the company’s capital in a group reorganisation.

The High Court found the solvency statement to be invalid, as the company relied on its subsidiary’s rental payments to meet its own liabilities under onerous leases in circumstances where that subsidiary had already failed to meet previous payments. Further, the director was wrong to assess the company’s solvency looking at the group as a whole and relying on potential payments from another company in the group where the company had no entitlement to such payments. The director had acted in breach of his duty to promote the success of the company and failed to exercise reasonable care and skill.

The two other directors – one of whom had resigned after the reorganisation had been planned but before the solvency statement was made, and the other who had been appointed after the solvency statement but during the implementation of the reorganisation – were also found to have acted in breach of duty. A director’s duties extend to the foreseeable consequences of his or her actions, and so even if a director resigned before or shortly after the events in question took place, they could not simply carry out steps which had been set in motion without satisfying themselves that those steps were in the interests of the company.

All three directors were held personally liable to repay the full amount of the dividend (some £21 million) to the company.

This decision acts as a useful reminder for directors of companies within a larger group that they must assure themselves that actions taken by a company are in the best interests of the company, and that they cannot excuse themselves from liability on the basis that they were not involved with those actions at the relevant time.

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Victoria Prince
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