Court rules in favour of directors of insolvent company

Directors of a company had not defrauded creditors when they took security for loans to the company as a liquidator had argued, the High Court in England has ruled. A report on the Out-Law.com site notes that the court said the directors of Burnden Holdings (UK) Limited had reasonably relied on the advice of professionals and had acted in the best interests of the company in entering into the transactions which the liquidator later challenged. The court also confirmed that the liability of directors for unlawful distributions was not strict but was fault-based. It considered the balance sheet insolvency test and reviewed in detail the statutory requirements in relation to distributions. The court has also followed the reasoning in the case Re MC Bacon that the granting of security is not a transaction at an undervalue. The judge said the test was fault-based rather than strict: if the directors knew of facts which constituted an unlawful dividend they would be liable whether or not they knew that the dividend was unlawful. However, if they were unaware of the facts that rendered the dividend unlawful but had taken reasonable steps to secure the preparation of accounts to establish that there were sufficient profits for that purpose they would not be liable if it later turned out there were insufficient profits. He said directors were entitled to reasonably rely on the advice and accounts prepared by the various professionals, particularly auditors.