Queensway Systems Ltd & Ors v Walker & Anor

A dividend is valid only where the company has properly exercised its statutory and constitutional powers. A unilateral document signed by one director cannot create a valid board resolution where the required quorum is absent. The Duomatic principle requires informed shareholder assent to the relevant matter.

A director may be liable for payments made for a co-director where the director knowingly permits an established practice of unauthorised payments to continue. Liability may arise under the statutory provisions governing loans to directors or independently from misapplication of company funds and breach of duty. Relief is unavailable where the director has not acted reasonably or where it would prejudice creditors.

The company entered creditors’ voluntary liquidation after payments had been made to or for the benefit of its two directors. The liquidators claimed repayment under sections 330 and 341 of the Companies Act 1985, alternatively for misapplication of company funds and breach of duty.

The defendants relied on a purported £190,000 dividend, said to have been declared in March 2001, and disputed the extent of their individual liabilities. The principal issues were whether the dividend was valid, whether the directors were jointly liable for £147,208.76, whether a further £40,000 was recoverable, whether relief under section 727 was available, and how contribution should be apportioned.

1. Dividend. No valid dividend was declared. The court rejected the evidence that the defendants had discussed or agreed to declare the dividend. The document signed by Mr Walker recorded, at most, a unilateral purported board resolution. Mrs Walker had received no notice of a meeting, and the articles required a quorum of two directors. Mr Walker acting alone could not pass a valid resolution. The requirements governing dividends under sections 270 and following of the Companies Act 1985 were mandatory and could not be treated as mere technicalities. The Duomatic principle did not assist because there had been no informed agreement by the shareholders.
2. Liability for £147,208.76. Mr Walker was liable for all relevant payments which he made or arranged. They were either transactions or arrangements for himself or for Mrs Walker which he authorised, or misapplications of company money. Mrs Walker knew that company money was being used to fund the parties’ joint lifestyle and knowingly allowed the established practice to continue. Applying Neville v Kirkorian, that conduct amounted to authorisation for the purposes of section 341(2), and alternatively participation in, or sanction of, breaches of duty. Both defendants were therefore jointly and severally liable.
3. Westfield payment. The further claim for £40,000 failed. The purported dividend did not reduce Westfield’s debt, and no sufficient evidential or pleaded basis established personal liability of either defendant for the alleged irrecoverability of that debt.
4. Relief. Although there was no finding of dishonesty, neither defendant had acted reasonably for section 727 purposes. It would also be unfair to relieve them where that would prejudice the company’s creditors.
5. Contribution. Neither defendant was entitled to a complete indemnity from the other. Contribution was to be considered by reference to the proportion in which each had benefited from the payments, subject to further evidence or agreement.

The defendants were ordered, subject to the form of order, jointly and severally to repay £147,208.76.