Global Corporate Limited v Hale in the Court of Appeal
 EWCA Civ 2618 (Patton, Asplin, Coulson LJJ) 27 November 2018.
In September 2017 HHJ Paul Matthews handed down a decision in the High Court which gave pause for thought to IPs seeking to recover unlawful dividends paid to directors in the period before insolvency.
Powerstation UK Limited was placed in CVL in November 2015. Their practice had been to pay the director an amount by way of salary and a further sum by way of ‘interim dividend’ and their accountant then advised after the year end if they had sufficient reserves to pay a dividend or not.
In two earlier years the accountant had advised there were no distributable profits and had reclassified the ‘interim dividends’ as salary, resulting in a liability for PAYE. The claim related to ‘interim dividends’ accounted for in the same way and paid between June and October 2015.
HHJ Matthews accepted the company had no distributable profits to cover the dividends and that accordingly they were prima facie unlawful, but he nonetheless rejected the claim on the grounds that either the decision to pay the dividend was provisional and subject to confirmation by the company’s accountant at the year end, or that there had been no valid decision at all to pay the monies as dividends when the monies were paid because the director did not have the power to make such a provisional decision.
As the company’s practice here is commonplace amongst SMEs, HHJ Matthews was seized upon with glee by those acting for directors and treated with scepticism by liquidators and their advisers.
The liquidators appealed and unsurprisingly the Court of Appeal found in their favour at the end of last year. The leading judgment by Patten J held that it was not part of the director’s original case that the ‘interim dividends’ were provisional and this was elicited as a result of cross-examination by the judge. But in any event the payments had been expressly declared as interim dividends and no steps had subsequently been taken to adjust these arrangements before the company was placed into liquidation.
Second, the payments were distributions within the meaning of s830 of the Companies Act 2006 and their legality should be tested at the date they were paid. For the purpose of s830, it was irrelevant that the dividends might subsequently have been re-characterised as salary if the Company had not been placed in liquidation.
The liquidator had advanced his claim on the alternative basis that the decision to make the payments was misfeasant, and at first instance, this claim failed because the judge held the director was entitled to set-off a quantum meruit claim for supplying his services.
The Court of Appeal rejected this argument, first because the House of Lords held in Guinness Plc v Saunders that the law will not imply a right to remuneration, and so any salary had to be sanctioned in accordance with the Articles, and second, even if the director had a quantum meruit claim, it could not be set-off against the claim for repayment of unlawful dividends.
The 2017 decision had already been queried in two subsequent first instance cases, but in light of this decision, directors/shareholders who have received payments accounted for at the time as dividends will not be able to argue that the payments were in fact made as salary and should be treated as such after the event.
For more information, please contact Nicholas Hughes at [email protected] or on +44 207 489 6323.