Global Corporate Ltd v Hale

A company may distribute profits only from sufficient distributable reserves. Historic losses are relevant, even where the company is trading profitably. A member’s liability for an unlawful distribution depends on knowledge of the relevant facts, not knowledge that the Companies Act has been contravened.

However, payments intended to remunerate necessary services are not necessarily recoverable as misfeasance, transactions at an undervalue or unlawful dividends. Where services are supplied on the basis that they will be paid for, the law may impose an obligation to pay a reasonable sum, preventing unjust enrichment. A claim concerning an unlawful preference must be expressly assigned, and the court will not determine it in the absence of parties able to obtain effective relief.

Powerstation UK Ltd entered creditors’ voluntary liquidation after experiencing substantial historic losses. Its former director and shareholder, Dirk Stefan Hale, had received regular payments described as dividends. The liquidators assigned to Global Corporate Ltd v Hale the company’s rights concerning alleged unlawful dividends and transactions at an undervalue.

The applicant sought recovery of the payments under sections 847 of the Companies Act 2006, 212, 238 and 239 of the Insolvency Act 1986. The central issues were whether dividends had been declared, whether the payments constituted misfeasance or transactions at an undervalue, and whether the applicant had title to pursue a preference claim.

1. Unlawful dividends. Sections 830 and 836 of the Companies Act 2006 required the legality of any distribution to be assessed by reference to sufficient distributable reserves shown in the relevant accounts. Profitability during the trading period and the ability to pay debts as they fell due were irrelevant. On the evidence, however, the respondent had not made legally effective declarations of dividends when the payments were made. Sections 830 and 847 therefore did not apply.
2. The respondent’s knowledge that the company had historic losses would, if section 847 had been engaged, have satisfied the knowledge requirement identified in It’s a Wrap Limited v Gula [2006] BCC 626. Knowledge of the facts producing unlawfulness was sufficient; knowledge of the statutory contravention was unnecessary.
3. Misfeasance and remuneration. The payments were made in respect of the respondent’s substantial and necessary services to the company. Applying the principle in Craven-Ellis v Canons Limited [1936] 2 KB 403, the law imposed an obligation to pay a reasonable sum where services were supplied on that basis. The payments therefore had legal justification and did not constitute misfeasance under section 212.
4. The same reasoning meant that the payments were not transactions at an undervalue under section 238. The alternative set-off argument also failed: unlike the position considered in Manson v Smith [1997] 2 BCLC 161, the respondent had provided services with the company’s knowledge and agreement, creating mutual dealings before liquidation.
5. The applicant had acquired no assigned preference claim. The assignment referred to unlawful dividends and transactions at an undervalue, not section 239. The court also declined to determine the preference issue in the liquidators’ absence because no effective order could be made. The application was dismissed.