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The recent Court of Appeal judgment in Global Corporate Ltd -v- Hale [2018] EWCA Civ 2618 serves as a useful reminder as to how the Court will treat dividend payments made by a company prior to its insolvency, and reinforces the rule that directors must be properly authorised by the company to receive remuneration.

This case was an appeal from the judgment of His Honour Judge Matthews ([2017] EWHC 2277 (Ch)) which dealt with a claim in the liquidation of Powerstation UK Ltd (the Company) concerning various payments amounting to £23,511 that the Company made to one of its directors and shareholders, Mr Hale, prior to the winding-up. The claim was brought by Global Corporate Ltd, to whom the Liquidators had assigned the claim.

The leading judgment of Lord Justice Patten deals with the status of these payments. Mr Hale’s position was that historically when these payments were made during the Company’s financial year they were declared as dividends, only to be ‘reversed’ by the Company’s accountant if it was found at the end of the financial year that the Company had insufficient distributable reserves. Although no evidence was received from the Company’s accountants, a letter from them was relied on by Mr Hale which claimed this was standard accounting practice.

Patten LJ dismissed this argument, on the basis that notwithstanding how the payments were treated by Mr Hale or the Company’s accountants (indeed, when paid they were expressly declared to HMRC to be interim dividends), they were still distributions paid at a time when the Company had insufficient distributable reserves. Therefore, and despite being reclassified at the end of the financial year, they were always unlawful and made in breach of s.830 Companies Act 2006.

Mr Hale’s second argument was that remuneration for his services paid on a quantum meruit basis should act as a set-off against the dividends claim. Patten LJ dismissed this argument in short order, relying on the House of Lords decision of Guinness Plc -v- Saunders [1990] 2 AC 663. That case held that the law could not imply a contract for a director’s remuneration when such matters could only be agreed under the Articles of Association or an appropriate resolution of the board. The rationale for that proposition was that a director acts as a trustee of a company and therefore is not entitled to profit from the trust except to the extent that they are so authorised to profit. In light of this, Patten LJ held that Mr Hale’s quantum meruit claim could not provide any sort of defence to the dividend claim.

This is a welcome decision for insolvency office holders. Whilst it does not create new law, it follows the recent line of cases (including last year’s decision in Toone -v- Robbins [2018] EWHC 569 (Ch)) which have held that dividends paid at a time when a company has insufficient distributable reserves will be unlawful and, consequently, repayable. Office holders will also breathe a sigh of relief that the Guinness -v- Saunders rule is still good law and provides a robust defence when directors assert a set-off to office holder claims on the basis of an entitlement to remuneration that has not been properly authorised.

If you would like to discuss the above in any more detail, please feel free to contact David Fendt, Ali Zaidi, or any member of our Restructuring & Insolvency Team.

Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.

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