Contesting Remuneration and Dividends paid to Directors

The Judgment is noteworthy and helpful for insolvency practitioners and lawyers as it deals with the omnipresent issue in insolvency litigation of contested remunerations and dividends paid to directors. The decision is back under the spot light as the cross-appeal depended on the first instance decision of His Honour Judge Matthews in Global Corporate Ltd v Hale EWHC 2277 (Ch), [2017] which was recently overturned by the Court of Appeal with its eagerly awaited judgment handed down on 27 November 2018 (Global Corporate Ltd v Hale [2018] EWCA Civ 2618).

 

The Facts

 

During 2009 the directors had paid themselves over £40,000, shown in the management accounts as remuneration. The Company’s bank statements showed that during the same period the directors had also received an additional £10,000 not recorded in the management accounts. The liquidators sought to recover these on the basis that nothing in the books and records showed that remuneration had been properly authorised by the company (and, in the case of the surplus £10,000, this was completely unexplained). In 2010, further payments, described as dividends, were made, which the liquidators sought to recover as an unlawful dividend. The directors argued that in fact these payments were additional remuneration.

 

What did the court decide?

 

At first instance the Chief Registrar held that the payments described as dividends were indeed dividends and not remuneration, and ordered them to be repaid. The claim for the other payments was unsuccessful for two reasons. The first was that the Duomatic principle applied, so that those payments appearing in the management accounts were adjudged to have been properly authorised. For the balance that did not appear in the management accounts, it was held that the liquidators had not satisfied the burden of proof to demonstrate that it was an unlawful remuneration payment.

 

The Appeal

 

The liquidators appealed and the directors cross-appealed. Mr Justice Norris dismissed the appeal in relation to the remuneration that formed part of the company’s records, holding again that they had been properly authorised. He allowed our appeal in relation to the balance and dismissed the cross-appeal upholding the dividends as unlawful. Accordingly, the directors were ordered to repay all the unlawful dividends, a proportion of the remuneration and costs.

 

Practical Implications

The main practical implication is that the cross-appeal depended on the first instance decision in Global Corporate v Hale, a case where a director was held to be entitled to receive most of his income as dividends rather than as salary and continued to do so even when there were insufficient profits to pay dividends on the basis that the company would have been unjustly enriched if the director was not paid for his work. This was disapproved, and Norris J’s decision upholds the principle established in Guinness Plc v Saunders [1990] and confirms that there is no room for an unjust enrichment or quantum meruit argument on the part of a defendant director, and that a distribution described as dividend but actually paid out of capital is unlawful, however technical the error.

The decision also places the burden of proof on directors to show that, where they have dealt with the company’s money, they have done so properly. At first instance, it was held there was a shifting burden, so that the director had to provide an explanation that a liquidator had to disprove. Norris J clarified the correct position as one where the director not only has to come up with an explanation but also to prove its accuracy.

 

The cross appeal itself could not have happened without the controversial first instance decision in Global Corporate & Hale. A much clearer state of affairs has been established by this case and the Court of Appeal’s decision in Global Corporate & Hale and, while not revelatory, these sensible decisions will hopefully stop a glitch in the law from taking hold and assist office-holders pursue these types of claims.

 

We have a team of lawyers committed to and experienced in pursuing all types of contentious office-holder and company claims who would be delighted to discuss the merits and procedure of any claims you are considering pursuing. Contact William Angas for more information.