The High Court decision in Burnden Holdings clarifies the law on retrospective attacks on the declaration of dividends.


A recent decision of the High Court of Justice in England & Wales in Re Burnden Holdings (UK) Limited (in liquidation) [2019] EWHC 1566 (Ch) (“Burnden Holdings”) provides a thorough review of English dividends law, including director liability in particular. It also provides helpful clarity on the scope of liquidator clawback proceedings. The case is relevant to English companies declaring dividends and to directors of English companies concerned about their personal liability, as well as to insolvency practitioners and financial advisers who need to consider the viability of liquidator clawback proceedings. It is also relevant to financial creditors, who, given the prevalence of ‘cov-lite’ terms, will be well advised to consider a broader purview of claims in their negotiating armoury, over and above their limited contractual rights.


Directors’ fiduciary duties

  • Even if it is later established that there were insufficient distributable reserves in relation to the declaration of a dividend, director liability for breach of fiduciary duty will be limited where the directors: (1) take reasonable care to ensure the accounts are properly prepared for the purpose of establishing the availability of sufficient profits to render the dividend lawful (‘reasonable care’ requires provision of full information regarding the company’s financial position); (2) seek appropriate specialist accounting and/or legal advice to the effect that there are sufficient reserves; and (3) make a proper record of the relevant facts surrounding the making of the dividend, as well as their reasons for it, in formal board resolutions.
  • As to the sufficiency of distributable reserves, the Court provided guidance on:
    • Misdescription of an asset in the accounts – This will not necessarily mean that the accounts do not enable a reasonable judgment to be made as to the assets, liabilities, profits and losses. The question depends on the accuracy of the ultimate calculation on an aggregate (not individual) basis.
    • Whether a loss constitutes a ‘realised loss’ – An overstatement of the carrying value of an asset will not necessarily require a realisable loss in respect of that asset. It will depend on all of the circumstances.
    • Directors will be reassured that the insolvency of a subsidiary will not necessarily carry a nil value on the balance sheet of its parent – It requires a broader, commercial assessment of value (as per BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2013] 1 WLR 1408).

Liability under section 423 Insolvency Act (IA)

  • Liability requires that the ‘real and substantial purpose’ in conducting the transaction must be to put the asset beyond the reach of creditors. Where there are two purposes: one being a valid commercial benefit and the other being a concern about solvency, the Court will consider the evidence when deciding whether the onerous burden of establishing the wrongful purpose has been established.


Burnden Holdings involved a classic attempt by a liquidator of an English company to clawback property of an insolvent English company for the benefit of its creditors. The clawback proceedings we consider here[1] arise from a declaration of a dividend and a distribution in specie (the “Distribution”) by Burnden Holdings (UK) Limited (the “Debtor”) of a subsidiary (“Vital”). The de-merger was intended to facilitate an employee incentive share plan for employees within the Debtor’s group. The plan was considered important for the prospects of Vital. There was evidence that the de-merger was also intended to assist in the face of of cash-flow concerns.

Among other things, the liquidator alleged that: (1) the Distribution was unlawful because of a failure to meet the then-applicable statutory requirements; (2) ‘The Distribution was effected by the defendants in dishonest breach of their fiduciary duties under s.172(3) of the Companies Act 2006 (the “2006 Act”) because either at the time of the Distribution or as a result of it they knew that BHUK was insolvent or likely to become insolvent and they failed to take account of the interests of BHUK's creditors’; and (3) the Distribution should be unwound as a transaction defrauding creditors under section 423 of the Insolvency Act 1986.

The Court dismissed all of the liquidator’s claims.


The then-applicable statutory provision provided that an English company ‘shall not make a distribution except out of profits available for the purpose’. As an overarching point, the liquidator asserted that liability under section 263 is strict. Specifically he claimed that the Distribution that was made was unlawful on the basis that:

A. the accounts did not enable a reasonable judgment to be made as to the assets, liabilities, profits and losses of the Debtor; and

B. there were in fact insufficient distributable reserves.

As a preliminary point, the Court accepted that, had the Debtor been rendered insolvent by the Distribution, and had the directors known it, then structuring the disposal of Vital by way of distribution rather than a sale would have been unlawful. Conversely, had the Debtor been solvent and remained solvent following the Distribution, then there would be nothing intrinsically wrong with causing the disposal of Vital and providing the Debtor no value for it. Particularly in a case such as this – where individuals structure their ownership of separate businesses through a single holding company (and where the debt funding is almost entirely from these individuals) – then, provided the holding company itself is solvent and the Companies Act requirements as to distributions are complied with, it is acceptable to separate one of those businesses from the holding company structure and take it into direct ownership without consideration being paid to the holding company.

As regards the question of liability being strict or fault-based, the Court thoroughly reviewed the jurisprudence of this question and emphatically decided that liability is fault-based.

On this issue, the Court specifically endorsed the position as it was at the end of the 19th Century. It is worthwhile setting out the Court’s summary of the position in full:

  • First, directors, although not trustees, are to be treated as if they are trustees in relation to the company's funds.
  • Second, if directors knew the facts which constituted an unlawful dividend, then they would be liable as if for breach of trust irrespective of whether they knew that the dividend was unlawful.
  • Third, however, if directors were unaware of the facts which rendered the dividend unlawful, and provided that they had taken reasonable care to secure the preparation of accounts so as to establish the availability of sufficient profits to render the dividend lawful, they would not be personally liable if it turned out that there were in fact insufficient profits for that purpose.
  • Fourth, directors are entitled to rely in this respect upon the opinion of others, in particular auditors, as to the accuracy of statements appearing in the company's accounts.

The Court said the only modification to the position reached in the 19th Century was as to the standard of knowledge – and the Court endorsed Nelson J’s test in Bairstow v Queen’s Moat Houses plc [2000] BCC 1,025. Directors will only be liable to repay a dividend if one of the following could be established:

  • they knew that the dividend was unlawful, whether or not that actual knowledge amounted to fraud;
  • they knew the facts that established the impropriety of the payments, even though they were unaware that such impropriety rendered the payment unlawful;
  • they must be taken, in all the circumstances, to have known all the facts which rendered the payment unlawful (i.e. imputed knowledge); or
  • they ought to have known, as a reasonably competent and diligent director, that the payments were unlawful.

Having examined the lengthy evidence, the Court held that there was no knowledge on the part of the directors (nor any grounds on which to impute knowledge) about the inadequacy of reserves.

Even though the above finding was sufficient to dispose of the liquidator’s claim, the Court went on to consider the question in paragraph (A) above, which involved an assessment of whether the Debtor had sufficient ‘profits’ for the Distribution that was actually made. ‘Profits’ under section 263 comprise a company’s accumulated, realised profits (so far as not previously utilised by distribution or capitalisation), less its accumulated, realised losses (so far as not previously written off in a reduction or reorganisation of capital duly made).

The Court examined the extensive evidence and made some helpful observations of principle about the accounts, including the following:

  • The existence of sufficient distributable profits is to be judged, in the first place, by reference to the most recent set of annual accounts (section 270(3) 1985). Where, however, the Distribution would be found to be in contravention if reference were only to be made to the company's last annual accounts, then interim accounts may be relied upon (section 270(4)).
  • The degree of detail and formality required for interim accounts will depend on the context. In circumstances where, as here, the Debtor was a private, non-trading holding company with assets that consisted mostly of investments in subsidiaries, and with liabilities that were mostly to its shareholders or subsidiary companies, this fact will be relevant and it is acceptable that the management accounts are relatively simple.
  • The effect of a misdescription of an asset in a company’s accounts requires an assessment, on an aggregate basis, of assets and liabilities. Provided the aggregate calculation accurately establishes that there are sufficient reserves, it is irrelevant that a particular figure comprising those calculations was inaccurate. Here, the misdescription arose in ascribing an asset as the value of shares in, and a debt due from, the wrong entity. The Court found that this misdescription did not render it impossible for a reasonable judgment to be made as to the Debtor’s assets, liabilities, profits and losses.

The Court considered in detail the requirements for a loss to be characterised as a ‘realised loss’ and held that even if the carrying value of an asset was overstated, that would not necessarily require a realisable loss to be recorded.


As regards liability under section 172(3) of the Companies Act 2006, directors will be reassured that the insolvency of a subsidiary will not necessarily carry a nil value on the balance sheet of its parent in respect of that asset – it requires a broader commercial assessment of value (as per BNY Corporate Trustee Services Ltd v Eurosail -UK 2007-3BL plc [2013] 1 WLR 1408).

The liquidator contended that the Distribution was effected in dishonest breach of fiduciary duty under section 172(3) on the basis that there was evidence establishing that the directors actually knew that the Debtor was insolvent or likely to become insolvent as a result of the Distribution and, in making the distribution, they failed to take into account the interests of the Debtor’s creditors. The liquidator made no alternative claim that the directors ought to have known. It was common ground that the Debtor was solvent immediately prior to the Distribution.

On the question of solvency, the Court reasoned that the focus should be on the balance sheet test rather than the cash flow test of insolvency in a case such as this where the company in question is a holding company and funded primarily by debt from its shareholders. The Court adopted a practical approach to the question of solvency and followed Eurosail in stating that, while the amounts recorded in the financial statements for assets and liabilities constitute evidence of their value, the focus must be on their commercial value.

The liquidator’s case depended primarily on the insolvency of the Debtor’s subsidiaries. The Debtor’s accounts showed the value of the subsidiaries as carried at historic cost and the debts due from those subsidiaries as carried at full face value. But, again following Eurosail, the Court held that it was the real value (not historic or face value) that mattered. The Court opined that while there was a relationship between the Debtor’s solvency and its subsidiaries, the test was more nuanced than that. The value of a subsidiary’s shares is affected by its insolvency but that doesn’t necessarily mean that there will be no value in its shares. This is because a company with positive future trading prospects (even if that is achieved only with further lending) can have a significant value notwithstanding its current insolvency.

On the question of the directors’ state of knowledge, the Court put a high bar on the knowledge requirement and held that it is not sufficient to establish knowledge of cash flow difficulties facing various entities within the Debtor’s corporate group. The question is whether they knew the Debtor was insolvent (not any other entity in the corporate group).

On the facts, the Court stated that the critical question was whether the directors knew that even with further debt funding for the group resulting from cash generated from the de-merger and subsequent sale, the subsidiaries were likely to go into a formal insolvency process so that there would be no value in the debts due from them and so that the Debtor’s contingent liabilities (under the subsidiaries’ leases) would be crystallised. On the question of the likelihood of the Debtor’s contingent liability crystallising, the Court held that that depended, not on the solvency status of the subsidiary, but on the ability of the subsidiary to continue trading and paying its debts as they fall due. The Court held that, based on the evidence, the directors honestly believed that the debt funding would be sufficient to enable the group to trade through difficulties.


Since the Court of Appeal’s decision earlier this year in Sequana S.A. [2019] EWCA Civ 112, the Court noted that it was now settled law that the payment of a dividend is capable of constituting a transaction defrauding creditors within the meaning of section 423 of the IA. For liability under section 423 to be invoked, the company must have entered into a transaction for a consideration the value of which (in money or money’s worth) is significantly less than the value (in money or money’s worth) of the consideration provided by the company and the transaction must be made for the purpose of putting assets beyond the reach of a creditor or liquidator. Insolvency (whether at the time of the transaction, the time the claim is initiated or at a subsequent time) is not a prerequisite.

The Court observed, since no consideration was in fact received by the Debtor for the Distribution, the only issue was whether the defendants' purpose in making the Distribution was to put the shares in Vital beyond the reach of creditors. The Court stated that the purpose must be a real substantial purpose (not merely a by-product of the transaction under consideration) but it does not need to be the sole or dominant purpose (IRC v Hashmi [2002] BCC 943, at [23]-[25] per Arden LJ).

Interestingly, the Court held that, although knowledge of insolvency (whether at the time of the transaction or as a consequence of it) is not a necessary precondition for a finding that the requisite purpose was present, it is at least a relevant consideration that the defendants did not believe that the company would be rendered insolvent as a result of the Distribution. This is because prejudice to creditors (in putting the asset beyond their reach, as per section 423) is more remote if the company's solvency is not affected by the transaction.

The Court, after considering the evidence – including that concerns of solvency had been discussed at board level at around the time of the Distribution – concluded that the principal purpose of the Distribution was to benefit the business of Vital by separating it from the business of the rest of the group so as to facilitate the implementation of Vital’s employee share incentive scheme. The Court accepted the board minutes and oral evidence of the defendants in this regard.


The Court also considered whether, if the issue were to become relevant on an appeal, the general exoneration provision under section 1157 of the Companies Act ought to be invoked. The provision allows a court to excuse a person from liability where it appears that the director acted honestly and reasonably and, having regard to all the circumstances, ought fairly to be excused. Applying the provision to the case of unlawful dividends, the Court noted precedents seeming to close out the availability of exoneration due to the conflict arising where a director receives the benefit of an unlawful dividend at the expense of unpaid creditors. However, the Court refused to close out the possible application of the provision. While a ‘powerful factor’, the Court held: ‘Whether that factor is enough to preclude relief being granted will depend upon matters such as the causal link between the dividend and prejudice to creditors, the length of time between the dividend and the action being commenced and whether the director retains the benefit of the dividend.’ (Burnden Holdings at [413])

Because of the hypothetical nature of determining the factual position that might be accepted on an appeal, the Court deferred deciding on whether the exoneration provision was available to the directors.