Global Corporate Ltd v Hale

A distribution must be lawful when it is made. Its character and legality depend on the payment itself, rather than the directors’ intention or an expectation that accountants might later reclassify it as remuneration.

A subsequent accounting recharacterisation cannot cure a distribution made without sufficient distributable profits. At most, the money may be notionally repaid and lawfully reapplied. After liquidation, an unliquidated quantum meruit claim ordinarily must be proved in the liquidation and does not answer a claim to recover an unlawful distribution.

A company paid a director-shareholder £23,511 in monthly sums recorded, reported to HMRC and taxed as interim dividends. The company’s last annual accounts disclosed insufficient distributable profits, and no interim accounts justified the payments. After the company entered creditors’ voluntary liquidation, its liquidators assigned the recovery claim to the appellant.

The High Court dismissed the unlawful-dividend claim, holding that the decisions were provisional or that no legally valid decision to declare dividends had been made. The central issue on appeal was whether the payments were nevertheless unlawful distributions when made and recoverable under the Companies Act 2006.

1. Appeal allowed. The payments were distributions made in contravention of section 830 of the Companies Act 2006. They had expressly been declared as interim dividends, reported to HMRC in that character and taxed accordingly. They therefore produced real legal consequences when paid.

2. The legality of a distribution must be tested at the time it is made. The payments were made to the recipients as shareholders, rather than as remuneration attributable to service contracts. They were therefore gratuitous distributions from the company’s assets which increased its balance-sheet deficit. The directors’ intention or state of mind did not alter that character.

3. The possibility that accountants might later treat the payments as salary did not make the dividend decisions provisional or legally ineffective. A subsequent recharacterisation cannot cure the original illegality. At most, the money may be notionally repaid and then reapplied in a manner which complies with section 830 and otherwise constitutes a lawful application of the company’s assets.

4. A quantum meruit claim could not provide a defence in the circumstances. Once the company entered liquidation, an unliquidated claim for compensation had to be proved in that liquidation. Unless the payments themselves could lawfully have been recharacterised as payments for services before liquidation, such a claim could not answer the demand for repayment. Guinness Plc v Saunders [1990] 2 AC 663 also illustrated the difficulty of implying remuneration where the articles required an appropriate board resolution.

5. Asplin LJ and Coulson LJ agreed that the trial judge’s questioning was inappropriate. A judge may clarify an unrepresented party’s evidence and may ask essential questions necessary for fairness. The judge must, however, avoid leading questions, exercise caution and remain within the pleaded case and evidential foundation. The questioning here introduced a new case that no definitive dividend decisions had been made.

1. Court of Appeal (Civil Division): The appeal was allowed. The High Court’s dismissal of the claim to recover the payments as unlawful dividends was reversed: [2018] EWCA Civ 2618.

2. High Court, Chancery Division: HH Judge Matthews dismissed the unlawful-dividend claim on alternative grounds that the dividend decisions were provisional or that no valid decision to declare dividends had been made: [2017] EWHC 2277 (Ch).