Bednash v Hearsey

In assessing whether directors’ remuneration payments constitute misfeasance, the reasonableness of the remuneration package as a whole is not decisive. The central questions are whether the company could afford the payment in the particular circumstances and whether authorising it amounted to gross negligence or was made without due regard to the company’s finances. Actual insolvency when the payment was made is unnecessary. A technically solvent company may suffer an irresponsible breach of duty where the payment threatens its financial position.

The liquidator of DGA (UK) Ltd sought recovery from its principal director under section 212 of the Insolvency Act 1986 for remuneration and pension contributions paid before the company entered creditors’ voluntary liquidation.

The deputy judge held that payments totalling approximately £250,000 constituted misfeasance, although he made no finding that the company was insolvent when the payments were made. He ordered repayment of £158,023 and costs, and refused permission to appeal. Mance LJ subsequently refused permission on the papers. The application was renewed before the Court of Appeal. The central issue was whether actual insolvency was necessary and whether the remuneration package’s overall reasonableness defeated the claim.

1. Application dismissed. The application for permission to appeal was refused because an appeal would have no reasonable prospect of success.

2. The reasonableness of the remuneration package as a whole was not decisive. The relevant question was whether, in the particular circumstances, the company could afford the payment and whether the decision to make it amounted to gross negligence. The court adopted the approach in In re Horsley & Weight Ltd [1982] Ch 442.

3. Actual insolvency at the date of payment was unnecessary. Directors of a technically solvent company may commit an irresponsible breach of duty where the company’s financial position makes the payment grossly negligent or shows a lack of due regard for its finances.

4. Reasonable latitude should be allowed in assessing directors’ remuneration, and exceptional circumstances would be required before directors could be expected to suspend their remuneration altogether. That latitude did not prevent a finding of misfeasance on the facts found by the deputy judge.

5. The deputy judge was entitled to conclude that the substantial pension contributions and salary payments were made when there was serious financial risk and no reliable basis for confidence that the company could afford them. The warning against hindsight did not require proof that the payments caused the subsequent liquidation.

• Court of Appeal (Civil Division): The renewed application for permission to appeal was dismissed.
• High Court, Chancery Division, Companies Court: The deputy judge held that specified remuneration and pension payments constituted misfeasance under section 212 of the Insolvency Act 1986, ordered repayment of £158,023 and costs, and refused permission to appeal.
• Permission stage: Mance LJ refused permission to appeal on consideration of the documents.