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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.
Similar to the Cayman declaration of solvency as set out in Section 124(2) of the Cayman Islands Companies Law (2018 Revision), Section 643 of the CA 2006 provides that it is a statement that each of the directors of the company have formed the opinion that there is no ground on which the company could be found to be unable to pay its debts on the date of the statement, and also formed the opinion that the company will be in a position to pay its debts in full within 12 months of the commencement of winding-up. In forming this opinion, the onus is on the director to prove that he or she had reasonable grounds for expressing that opinion. LRH Services Limited confirmed the position set out in BTI 2014 LLC -v- Sequana  EWHC 1686 (Ch) that a solvency statement is valid so long as the director honestly and genuinely formed the required opinion, even if the director did not have reasonable grounds for holding it. In forming this opinion, directors are required by the legislation to take into account all the company’s liabilities.
To continue reading full articles in PDF format:
Tread with Care: Directors’ Declaration of Solvency