It's A Wrap (UK) Ltd v Gula & Anor

Liability under section 277(1) of the Companies Act 1985 requires knowledge of the facts making a distribution unlawful. It does not require knowledge that those facts constitute a statutory contravention or knowledge of the statutory restrictions themselves. The provision must be interpreted consistently with article 16 of the Second EC Directive on Company Law (77/91/EEC). The ordinary rule that ignorance of the law is no defence applies because the remedy is protective rather than penal. The appeal was decided on actual, fact-based knowledge; the precise scope of the alternative reasonable-grounds limb was left open.

The appellant company, later placed into creditors’ voluntary liquidation, sought repayment of dividends paid to the respondent directors and shareholders. The company had made losses and had no retained realised profits. The respondents knew the company’s financial position but argued that they did not know the payments contravened the Companies Act 1985.

The Chancery Division entered judgment for the respondents on 16 September 2005. The deputy judge held that section 277(1) required knowledge both of the relevant facts and of the legal consequence that the distribution contravened the Act. The central issue on appeal was whether knowledge of the facts alone was sufficient.

1. The appeal was allowed. The respondents were liable under section 277(1) of the Companies Act 1985 because they knew that the company had no profits and that the payments were dividends.
2. Section 277(1) had to be interpreted, so far as possible, in conformity with article 16 of the Second EC Directive on Company Law (77/91/EEC). Article 15 established the substantive restrictions on distributions and article 16 required repayment where the shareholder knew of the irregularity or could not have been unaware of it.
3. The reference to the irregularity concerned the factual condition that the distribution was contrary to the statutory restrictions. The company therefore had to prove knowledge of the facts constituting the contravention, not knowledge of the relevant statutory provisions or of the legal conclusion resulting from those facts.
4. The ordinary presumption that a person knows the law applied. Article 16 was not penal. Its purpose was to protect creditors by preserving capital, and there were no sufficient indications that ignorance of the law should provide a defence.
5. Whether a distribution contravened Part VIII was an objective question. The relevant facts had to be ascertained by reference to the company’s accounts and the statutory rules governing distributions. The precise meaning of the alternative reasonable-grounds limb was unnecessary to decide. Chadwick LJ expressed the provisional view that it did not necessarily equate to negligent constructive knowledge.
6. The observations in Bairstow v Queen’s Moat Houses [2001] 2 BCLC 531 were obiter and did not establish that knowledge of legal unlawfulness was required. Thorne v Silverleaf [1994] 1 BCLC 637 and Swain v Puri [1996] PIQR 442 concerned different statutory provisions and did not determine the present question.
7. The judge had also erred procedurally by allowing Mr Gula to give evidence during submissions after he had declined the opportunity to give evidence from the witness box.

• Court of Appeal (Civil Division): [2006] EWCA Civ 544. The appeal was allowed.
• Chancery Division: On 16 September 2005, Mr Nicholas Davidson QC sitting as a deputy judge entered judgment for the respondents and granted permission to appeal.