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RECENT CASES |
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Directors’ duties in relation to dividend payments See CLM ¶1641, ¶3000+, ¶3408+ Re AG (Manchester) Ltd (formerly The Accident Group Ltd) (in liquidation), Official Receiver v Watson and Langford [2008] EWHC 64 (Ch) Disqualification proceedings were commenced against Mr W, finance director of AG(M) Ltd. Mr W and 2 other directors formed an “inner circle” on the board which took over decision-making without any proper delegation from the full board. The main allegations of unfitness centred around the authorisation of interim dividends. Mr W allowed them to be declared when he knew or should have known that it was unlawful (or at least imprudent) to do so. He falsified minutes of a full board meeting approving the interim dividends, when in fact the decision was just made by the inner circle. These minutes were submitted to the auditors (which in itself is an offence, see CLM ¶4298). It is the duty of a company's finance director to assess the company's ability to pay dividends and to inform the board (and through the board, the shareholders) of any problems with the proposals. If the shareholders are determined to overrule the board and pay themselves dividends that the company cannot afford, the directors must resign. They cannot merely acquiesce in dividend decisions without considering all of the issues involved. In making their decision, they must ensure that the company remains solvent and complies with the relevant legislative requirements. As a result of this and his other breaches, Mr W would be disqualified (for a period to be determined at a later hearing). Mrs L, one of the “outer circle” directors and an owner of the company was disqualified for 4 years because she allowed or acquiesced in the inner circle taking control of decision-making. Liquidator did not owe duty of care to individual creditor See CLM ¶7428, ¶7429 Hague and PricewaterhouseCoopers v Nam Tai Electronics [2008] UKPC 13 A recent Privy Council case illustrates how careful creditors must be when deciding which type of action to take against a liquidator. NTE Inc was a creditor of TA Inc, a company in liquidation. Mr H was TA Inc's liquidator. NTE Inc brought proceedings against Mr H for breach of duty for alleged failures to collect or take control of TA Inc's assets to pay off its debts, claiming that it had suffered damage of over $35 million as a result. The court found that the proceedings were misconceived. Mr H owed this duty to the creditors as a whole, but the proceedings were brought by NTE Inc for its own benefit. There was no evidence of a special relationship between Mr H and NTE Inc that would give rise to a specific duty of care towards NTE Inc. NTE Inc was the largest creditor by a long way, but it was still just one of a group and any action for breach of duty should have been brought by the group to which the duty was owed. An action for misfeasance against the liquidator would have been more appropriate in this case. A single creditor can make the application. The court can then investigate the conduct of the liquidation and order the liquidator to contribute to the company's assets for the benefit of the creditors as a whole. Secured creditors’ access to ring-fenced fund See CLM ¶7994+, ¶8101 Re Airbase (UK) Ltd and Re Airbase International Services Ltd, Thorniley and another v HMRC and another [2008] EWHC 124 (Ch) In a recent case, the court had to decide whether the ring-fenced fund can be used to meet any unsecured balance of debts due to secured creditors. Ring-fencing applies in liquidations, administrations and receiverships (if the receiver was appointed under a post-15/9/03 floating charge) where the company’s assets are subject to a floating charge created on or after 15 September 2003. The relevant insolvency practitioner must, with some exceptions, ring-fence a certain proportion of the assets subject to the charge to distribute to the unsecured creditors. This fund cannot be used for anything else until the unsecured creditors’ claims are satisfied, not even payment of insolvency expenses. Without this mechanism, unsecured creditors would receive very small, or no, distributions in most corporate insolvencies. In this case, H NA held fixed and floating charges over the assets of AS(UK) Ltd and ASI Ltd. Both companies went into administration. H NA’s security fell short by a substantial amount. If it were allowed to participate in the distribution of the ring-fenced fund, the dividends payable to the unsecured creditors (i.e. H NA for the unsecured portion of its debt, plus the other unsecured creditors) would be 4.08p in the £. If H NA were not allowed to participate in this distribution, the dividends would be 15.56p in the £ for the “real” unsecured creditors. The court held that secured creditors were not allowed to participate in the distribution of the ring-fenced fund for any unsecured portion of their debts. The changes introducing this mechanism were intended to ensure that unsecured creditors received a distribution where possible. If secured creditors could participate, even to the extent that their security falls short, it would defeat this purpose and render some of the legislative provisions inoperable. |