Brown & Anor v Button & Ors

A company’s directors are jointly and severally liable under Companies Act 1985, section 341(2), to indemnify the company for loss resulting from loans made in breach of section 330. Dividends cannot discharge that liability unless lawfully declared from distributable profits. Annual accounts must give a true and fair view, and an interim dividend requires proper interim accounts. A liquidator’s statutory application does not create a new cause of action or distinct limitation period.

The joint liquidators of Broadside Colours and Chemicals Ltd applied under section 212 of the Insolvency Act 1986 against the company’s three directors for sums recorded in directors’ loan accounts. The respondents argued that the loans had been discharged by final and interim dividends, that later payments were salary, and that the claims were statute-barred.

The court considered whether the loans contravened sections 330 and 341 of the Companies Act 1985, whether the dividends were lawful distributions, whether later payments were loans or remuneration, and whether the directors could rely on limitation.

1. The application succeeded in part. The loans made before 1 January 2007 contravened section 330(2)(a) of the Companies Act 1985. The directors knew of and authorised them, engaging the indemnity obligation in section 341(2)(b).

2. The final dividend was unlawful. Under the company’s articles and sections 263 and 270 to 276, a distribution could be made only from distributable profits. The July 2003 financial statements did not give a true and fair view because of the treatment of the subsidiary investment and stock valuation.

3. The interim dividend was also unlawful. No interim accounts were available when it was declared. The directors could not form a reasonable judgment on the matters identified in section 270(2).

4. Payments after March 2004 were loans, not salary. There was no contemporaneous documentation, PAYE treatment or consistent evidence of remuneration.

5. The indemnity obligation arose when each loan was made. It was not a continuing duty to recover the loans. The court disagreed with the contrary view expressed in Re Mumtaz Properties. Following Re Eurocruit Ltd [2007] BCLC 598, section 212 was procedural and created no distinct limitation period.

6. The claims succeeded against the directors who personally received the money, but failed against Mrs Button. Judgment was ordered against Geoffrey Button for £57,546.50 and James Button for £65,375.91, subject to arithmetic and interest.