Global Corporate Ltd v Hale [2018] EWCA Civ 2618

Global Corporate Ltd v Hale [2018] EWCA Civ 2618: the Court of Appeal (Civil Division) allowed an appeal against the dismissal of a claim to recover £23,511 paid to a director and shareholder as dividends when the company had no distributable profits, holding that the legality of a distribution is tested when it is made and cannot be cured by a later intention to re-characterise it as remuneration.

The respondent was a director and shareholder of Powerstation UK Ltd. Between June 2014 and October 2015 he received monthly payments of £1,383, each recorded in a dividend tax voucher prepared by the company’s accountants and signed by him as an “interim dividend”. On accountancy advice he and his co-director took a small salary through PAYE and the rest as dividends for tax efficiency. In two earlier years the accountant had “reversed” dividends at the year end where reserves were insufficient, treating them as remuneration. The company had been balance sheet insolvent since 2009 and its last annual accounts, for the year ended April 2014, showed insufficient distributable reserves. It went into creditors’ voluntary liquidation on 25 November 2015 with an estimated deficiency of about £173,595. The liquidators assigned their claims to the appellant, which sought repayment as unlawful dividends, as a transaction at an undervalue or preference, and for misfeasance. There were no interim accounts for the period.

HH Judge Paul Matthews, sitting as a judge of the High Court, dismissed all the claims. There was no appeal against the dismissal of the claims under sections 238, 239 and 212 of the Insolvency Act 1986. On the dividend claim the judge accepted that, with no profits available under section 830(2) of the Companies Act 2006, payment as dividends would be unlawful and repayable under section 847(2) and the general law. The judge nonetheless found, after questioning the respondent at the end of cross-examination, that the respondent did not think he was making definitive decisions to declare dividends but no decision at all, since everything depended on the year-end review of reserves; so the payments were not dividends and sections 830 and 847 did not apply.

Patten LJ, giving the lead judgment, found the reasoning difficult to follow. The respondent, who appeared in person, had always said that the payments were dividends and lawfully paid; it was never suggested that the decision was provisional or not a decision at all. The finding rested on a new line of questioning, much of it “highly leading”, introduced by the judge without any existing evidential basis, which was not satisfactory.

On the substance, read in the context of the evidence as a whole, the respondent’s answers meant no more than that the accountants could later recommend a different treatment. The payments were expressly declared as interim dividends, declared to HMRC and taxed, and so had real legal consequences; no re-characterisation had occurred before liquidation. More fundamentally, the payments were distributions within section 830 when made, and that is when legality is tested. There was no evidence of service contracts to which they were attributable, and they were taken as shareholders, not as remuneration. Section 830 is directed to distributions as and when made, and a later realisation that they should not have been made, prompting treatment as remuneration, “cannot cure the illegality of the original payment”; at most it allows the money to be notionally repaid and lawfully re-applied. The judge had wrongly concentrated on the directors’ state of mind rather than on whether the payments, when made, were lawful distributions, to which there could be only one answer.

On the judge’s view, expressed in the misfeasance context, that a quantum meruit claim for services could justify the payments, Patten LJ noted that in Guinness Plc v Saunders [1990] 2 AC 663 the House of Lords held that the law would not imply a contract for remuneration that could only be agreed by board resolution under the articles. Once the company is in liquidation, a quantum meruit claim is an unliquidated claim to be proved in the liquidation and could provide no defence unless the payments could be re-characterised as lawful payments for services before liquidation, which counsel for the respondent accepted was not possible. The appeal was allowed.

Asplin LJ agreed, adding that a judge may properly ask questions to clarify evidence and, where a party is unrepresented, to understand that party’s case, but should avoid leading questions of the party as a witness, limit such questioning to essential matters and not stray from the case as pleaded and the evidence. Coulson LJ agreed that the judge’s long leading questions, in which the answer considered correct was made obvious, on an issue never previously raised, “went much too far” in attempting to counter any perceived inequality of arms.

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