Make sure you are actually solvent before making such a declaration
21 December 2018: A recent High Court case, LRH Services Limited (in liquidation) v Trew and others, serves as a useful reminder to directors that a declaration of solvency should not be made unless the board are satisfied that their opinion on the company’s solvency has been properly formed.
In this case, the liquidator of LRH Services Limited brought an action against three former directors of that company in relation to a reorganisation of the group of companies which they had carried out and which involved a reduction of share capital and a £21m dividend being paid to the parent company, shortly after which the company entered liquidation. As required by Section 643 of the Companies Act 2014, the directors had made a solvency statement prior to the reorganisation but it was subsequently held that the solvency statement was invalidly made. The court found that when the opinion of solvency was being formed, one of the directors was relying on the parent company to discharge the company’s liabilities, with no binding agreement in place for it to do so. It was further noted that the directors failed to make any enquiry or give any consideration to the company’s actual liabilities as is required. The court therefore made each of the three directors personally liable for the £21m dividend paid out.
Directors should therefore always remain mindful of the potential implications of making a declaration of solvency should it later be determined that the underlying opinion on solvency was misconceived. Please do not hesitate to contact any of the BRI Management Team should you require any assistance in winding up a company’s affairs.