Global Corporate Ltd v Hale

The Court of Appeal allowed the appellant's appeal and held that the payments of £23,511 to the respondent were unlawful distributions within the meaning of the Companies Act 2006 and were repayable. The court applied ss.830, 836 and 847 CA 2006, holding that the legality of a distribution is to be assessed at the time it is made and that subsequent treatment as remuneration cannot cure an unlawful distribution. The judge at first instance erred by basing his decision on a finding that no definitive decision to declare dividends had been made, a finding derived from the judge's own leading questioning of an unrepresented defendant and not from the pleaded case or evidence. The court also observed that a quantum meruit argument would not provide an effective defence to recover an unlawful distribution in liquidation.

Background and facts:

• Between 24 June 2014 and 26 October 2015 the respondent, a director and shareholder of Powerstation UK Ltd, received monthly payments totalling £23,511 recorded internally and reported to HMRC as "interim dividends".
• The company entered creditors' voluntary liquidation on 25 November 2015 with an estimated deficiency. The liquidators considered the dividends unlawful because the company's last annual accounts showed insufficient distributable reserves under s.830 CA 2006 and demanded repayment; the liquidators assigned their relevant rights to Global Corporate Limited.

Nature of the proceedings and procedural history:

• Global, as assignee, applied in the High Court for declarations and repayment, advancing alternative claims that the payments were unlawful dividends (Companies Act), transactions at an undervalue or preferences (Insolvency Act 1986 ss.238/239), and misfeasance (s.212 IA 1986). The High Court (HHJ Matthews) rejected the unlawful dividends claim on the basis that no definitive dividend decision had been made, and dismissed the IA 1986 claims and the misfeasance claim for other reasons. Global appealed to the Court of Appeal.

Issues framed:

• Whether the payments were unlawful distributions under ss.830 and 836 CA 2006 and therefore recoverable under s.847 CA 2006;
• whether the payments could be recharacterised or treated as not having been validly declared because they were provisional or subject to later re‑characterisation by the accountant;
• whether alternative insolvency remedies or a misfeasance/quantum meruit defence could defeat recovery.

Court of Appeal reasoning and conclusion:

• The court held that the payments were declared and treated as interim dividends at the time of payment and so their legality must be tested at that time by reference to the company's last annual accounts under s.836. There were no interim accounts to justify the distributions.
• The trial judge erred in treating as decisive his own line of questioning which suggested the directors believed declarations were provisional; that finding was not part of the respondent's pleaded case and lacked evidential foundation.
• Recharacterisation after payment cannot cure the illegality of distributions when made; at most monies could be notionally repaid and re-applied lawfully, but that does not defeat a claim for recovery from the member who received unlawful distributions.
• The court noted that a quantum meruit claim would not provide an effective set-off or defence in liquidation in the circumstances, and relied on authority limiting implied contractual remuneration where articles or proper corporate formalities apply.

Outcome: the appeal was allowed and the House of Appeal restored the finding that the payments were unlawful distributions and recoverable.

Appeal allowed. The Court of Appeal held that the payments were unlawful distributions under ss.830, 836 and 847 Companies Act 2006 and repayable; the High Court’s contrary finding rested on an unsupported factual finding produced by the judge’s own leading questioning that no definitive dividend decision had been made. The legality of a distribution is assessed at the time it is made and subsequent recharacterisation does not cure an unlawful distribution. A quantum meruit defence was not sufficient to defeat recovery in the liquidation context.

Appeal from the High Court (Chancery Division, Bristol District Registry), HH Judge Matthews [2017] EWHC 2277 (Ch), to the Court of Appeal [2018] EWCA Civ 2618. The appeal was allowed by the Court of Appeal.