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Director liability for Unlawful Dividends: Strict or Fault Based?

Director liability for Unlawful Dividends: Strict or Fault Based? In a very lengthy judgment extending to an eye-watering 513 paragraphs, as far as Mr Justice Zacaroli was concerned in the matter of Burnden Holdings (UK) Ltd v Fielding & Anor [2019] EWHC 1566 (Ch) it would seem he considered that Director liability for unlawful dividends is fault based.

The claim was issued not far off 6 year ago. The trial lasted 12 days and then there were written submissions and the judge indicated that in general none of the witnesses had independent recollection of events that took place almost 12 years previously.

The Judges Conclusions

  1. The liqudator was appointed long after the events in question and consequently was not in a position to give evidence about the events that took place.
  2. The question of sufficiency of distributable profits may turn on matters of fine accounting judgment.
  3. Directors do not need to be accountants.
  4. The suggestion appears to be that liability for dividends is fault based and not one of strict liability.
  5. It is not necessary for interim accounts deployed for determination of distributable reserve as ‘relevant accounts’ to necessarily be situated in one document.

If the matter of a level of distributable profits turns on matters of fine accounting judgment then what are the implications for the potential ambiguity and uncertainty that position could give rise to? Are Directors going to have to be more careful than ever before relying on accounts to declare dividends or will it provide Directors with a further defence?

The proposition that interim accounts do not need (for dividend purposes) to be comprised in single document necessarily does not appear to have been fully fleshed out.

For the above reasons, I conclude that the law on the issue whether liability is strict or fault-based remains the same as it was at the end of the 19th Century (as summarised in paragraph 139 above).

I consider this to be consistent with first principles, so far as it applies to the payment of unlawful dividends. The question whether there are sufficient distributable profits may turn on fine questions of accounting judgment. Directors are not required to be accountants and the comments of Lord Davey and Lord Halsbury LC in Dovey v Cory 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.

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Disclaimer: Director Liability For Dividends

This page: Director Liability For Dividends is not legal advice and should not be relied upon as such. This article Director Liability For Dividends is provided for information purposes only. You can Contact Us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

Elliot Green

Licensed Insolvency Practitioner & Chartered Accountant. We Know Insolvency Inside Out.

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