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A recent case from the English High Court, LRH Services Limited (in liquidation) -v- Trew and others  EWHC 600 (Ch) (“LRH Services Limited”) provided a cautionary reminder to directors of the consequences that can arise in signing declarations of solvency, without having carried out the necessary inquiries as to the company’s affairs.
In this case, the liquidator of LRH brought a claim against three former LRH directors. The directors had formulated and implemented a group reorganisation whereby LRH’s share capital had been reduced pursuant to Section 643 of the UK Companies Act 2006 (“CA 2006”). Under section 643 of CA 2006 a company can reduce its share capital if each company director makes a solvency statement. In order to avail of the section 643 procedure, a solvency statement was therefore made by the directors of LRH. The reorganisation resulted in a £21 million dividend being paid to the parent company after LRH went into liquidation.
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Tread with Care: Directors’ Declaration of Solvency