Precision Dippings Ltd v Precision Dippings Marketing Ltd

A distribution is unlawful where the statutory accounting requirements governing its payment have not been met at the time of payment. Where the relevant annual accounts contain a qualified audit report, the required written auditor’s statement is a substantive safeguard for creditors, not a procedural formality capable of waiver by unanimous shareholders.

A post-liquidation statement and shareholder resolution cannot ratify an ultra vires distribution to the prejudice of creditors. A recipient which had notice of the facts and gave no value holds the payment as constructive trustee and must repay it. Statutory liability for an unlawful distribution does not exclude that equitable obligation.

The claimant company paid its parent company a dividend of £60,000 in September 1982. Its relevant annual accounts had a qualified audit report, but the auditors had not provided the written statement required by section 43 before the dividend was paid. The payment exhausted the company’s available cash. It entered creditors’ voluntary liquidation in August 1983.

After liquidation, the auditors stated that the qualification was immaterial and the shareholders purported to accept that statement by resolution. A Registrar gave the company judgment under Order 14. The High Court gave all defendants unconditional leave to defend. The company appealed only in respect of the recipient parent company.

The issue was whether the later auditor’s statement and shareholder resolution prevented recovery of the dividend under Companies Act 1980.

Appeal allowed. Dillon LJ held, with whom Sir Edward Eveleigh agreed, that the Order 14 judgment against the first defendant should be restored.

1. Section 39(1) of the Companies Act 1980 prohibited a distribution except out of profits available for the purpose. Section 43(1) made compliance with its accounting requirements mandatory. The relevant accounts had a qualified audit report. The auditors’ written statement required by section 43(3)(c), and its laying before the company under section 43(3)(d), had not occurred before the dividend.

2. The statutory language showed that the statement had to be available before the distribution. Its absence meant that section 39 was, by section 43(1), to be treated as contravened. The dividend was therefore ultra vires, irrespective of the later auditor’s view that profits were available.

3. The requirement was an important creditor-protection measure, rather than a procedural irregularity capable of waiver by members. Once the company was insolvent and in liquidation, members could not ratify the payment in a manner which displaced the liquidator’s title or prejudiced creditors. The court left open whether a solvent company could have restored the position by later steps.

4. The recipient had notice of all material facts through its directors and shareholders, and had given no valuable consideration. It therefore held the money as constructive trustee, applying Rolled Street Products (Holdings) Ltd v British Steel Corporation [1985] 2 WLR 908. Section 44(2) preserved that equitable obligation. Section 61 of the Trustee Act 1925 could not authorise the recipient to retain an unlawful payment by excusing its refusal to repay.

The High Court order was set aside so far as it concerned the first defendant, and the Registrar’s judgment for repayment of £60,000 with interest was restored. The appeal was allowed with costs.

• Court of Appeal: allowed the company’s appeal and restored the Registrar’s Order 14 judgment against the first defendant: [1986] Ch 447.
• High Court, Chancery Division: His Honour Judge Micklem allowed the defendants’ appeal from the Registrar and gave them unconditional leave to defend. That order was set aside only as regards the first defendant.