SSF Realisations Ltd (In Liquidation) v Loch Fyne Oysters Ltd and others [2020] EWHC 3521 (Ch). Partner Karen Dobson acting on behalf of Simon Bonney and Andrew Hosking of Quantuma Advisory Limited, the joint liquidators of SSF Realisations Ltd (“the... Read more

SSF Realisations Ltd (In Liquidation) v Loch Fyne Oysters Ltd and others [2020] EWHC 3521 (Ch). Partner Karen Dobson acting on behalf of Simon Bonney and Andrew Hosking of Quantuma Advisory Limited, the joint liquidators of SSF Realisations Ltd (“the Company”), recently succeeded in the High Court in a claim for repayment of unlawful dividends declared by the Company’s board in favour of its parent company, Loch Fyne Oysters Ltd (“LFO”), and in the claim against two of its directors for breach of duty.

The judgment contains a helpful summary of the legal principles regarding unlawful dividends and the circumstances in which a director might be excused from personal liability for breach of duty pursuant to section 1157 of the Companies Act 2006.

Karen Dobson provides a summary of the case and the Judge’s findings below;

The Facts of the case

Over a period of years, an inter-company balance had built up between SSF Realisations Ltd (“the Company”) and Loch Fyne Oysters Ltd (“LFO”) such that, as at October 2011, LFO owed the Company just under £1m comprising mainly the cost of supplies which the Company had made directly to LFO’s customers.

By 2011 both the Company and LFO were in financial difficulty.

By September 2011 there was a proposal by Scottish Salmon Company Ltd to acquire LFO but it was a term of the acquisition that there be a clean break between LFO and the Company, that the Company be sold to a third party and that the inter-company balance be cleared.  In order to achieve the latter, the Company’s directors called a Board Meeting which was held on 21 November 2011 and approved the payment to LFO of an interim dividend of £500,000 and a management charge of £330,000 which were offset against the debt owed by LFO to the Company.  Some weeks later the dividend of £500,000 and the management charge of £330,000 were entered into the Company’s accounts. The management charge was later reduced to £244,916 and hence the total distribution was £744,916.

The Company’s November 2011 management accounts indicated that, as a result of the dividend and the management charge, the Company was insolvent.

The Company continued to trade for several years but never returned to solvency.  In June 2016, it was placed into administration and liquidation followed in November 2016.

In October 2017, Sherrards, acting on behalf of Simon Bonney and Andrew Hosking of Quantuma Advisory Limited, the joint liquidators of the Company, brought High Court proceedings against LFO and the Company’s Directors claiming that:-

  • The management charge was not genuine and was in fact a disguised distribution by the Company to LFO;
  • When the amount of the management charge was combined with the amount of the dividend, the Company did not have sufficient profits to make the distribution; and
  • LFO and the Company’s Directors were therefore required to repay the unlawful distribution and compensate the Company.

The Judgment

The claim was successful to the extent of £316,859.00 being the amount by which the dividend and the management charge exceeded the Company’s distributable profits.

The Company’s Directors did not dispute that the purpose of the management charge was to reduce LFO’s liabilities to the Company but they claimed that the charge was a proper one, because it covered costs actually incurred by LFO which it was fair to recharge to the Company.  These included charges in relation to transport services, the supply of discounted products to the Company and the secondment of employees.

The Judge however noted that prior to November 2011, LFO had never imposed a management charge on the Company for any services that it had provided.  The first mention of the management charge was in November 2011 as part of a means by which to reduce LFO’s debt to the Company.

The Judge also noted that a group company is not automatically required to reimburse another group company for services provided and that an obligation to do so would only arise if the criteria for implying a contract were satisfied. In this case, the Judge concluded that there had been no such contract.  He took heed of the fact that the Company’s accounts had made no provision for any re-charge costs to be paid to LFO.  The Judge stated that it also accorded with commercial reality in that a holding company might choose to support a subsidiary by contributing capital or providing benefits in kind in the expectation that the value of its investment would rise.

He found therefore that the management charge was a voluntary distribution of assets to LFO as shareholder.

He concluded that on the facts, the total amount of the distribution i.e. the dividend and the management charge, exceeded the Company’s distributable profits and was unlawful to the extent of the difference namely the sum of £316,859.

The Judge also decided that not only was LFO required to repay the distribution but also, two of the Company’s directors were in breach of duty and jointly and severally liable to compensate the Company for the unlawful portion of the distribution.  The Judge found that the two directors failed to act in the interests of creditors at a time when the Company was or was likely to become insolvent as a result of the distribution.

There was a third director of the Company against whom claim was made but although the Judge found that he was in breach of his duty as director, he was excused from liability pursuant to Section 1157 of the Companies Act 2006.

It is open to any director to seek to be excused from personal liability for breach of duty under Section 1157 of the Companies Act 2006 if they have acted honestly and reasonably and in all the circumstances, they ought fairly to be excused.

Of the three directors against whom claim was made, the Judge found that two were highly experienced businessmen who fully understood their actions and took no steps to even investigate the possibility of reversing the transactions when it was apparent that they rendered the Company insolvent.  Accordingly, they were not excused. However, the third director, who had no financial or accounting expertise, had relied entirely on the others and played a very limited role in relation to the distribution, was excused from liability.

Conclusion

This case serves as a stark reminder of the risks directors face when declaring dividends and distributions and the need for them to take extreme care to ensure that they only sanction distributions out of available profits as otherwise, this could come back to bite them many years down the line.

Directors must thoroughly scrutinize every payment, disposal or transfer of value by a company to its holding company or to any shareholder and assess whether that transaction is, in reality a distribution and, if it is, whether the company has sufficient profits to make that distribution.

Click here for a link to the High Court Judgment.