Toone v Robbins

This appeal concerned whether payments by a small company to its directors were lawful remuneration or unlawful dividends and therefore recoverable by the joint liquidators. The court considered the companys Articles (incorporating Table A Regulation 82 and Article 8), relevant provisions of the Companies Act 2006 (in particular sections 281, 318(1), 355 and 357) and the Duomatic principle. It held that a sole-member decision taken under Article 8.1 was not invalidated by non-compliance with Article 8.2 and that the proper construction of the Articles and s.357 meant the formal failure did not void the authorisation of the 2009 payments recorded as wages.

By contrast, payments recorded and paid as "dividends" were unlawful where there were no distributable profits or where the recipient held no shares, and were recoverable as unlawful dividends. The court further held that where company bank records showed unexplained payments, the evidential burden fell on the directors to explain them; absent a satisfactory explanation in respect of £10,092 they were required to repay that sum. Section 1157 relief could not be used to retain unauthorised distributions, consistent with the principle in Guinness that the court cannot amend the Articles to authorise unauthorised director profit.

Background and parties:

• Pinetum Ltd (the Company), a phoenix company acquiring the business of Pinetum Manufacturing Ltd in 2009, was run by directors Dean and Richard Robbins who were the sole director/shareholder stakeholders. The Company became insolvent, administrators were appointed and the Company entered creditors' voluntary liquidation. Mr Toone and Mr Murphy were appointed joint liquidators and brought proceedings to recover payments to the directors.

Nature of the claim and procedural posture:

• The joint liquidators sought repayment of payments made to the directors on two bases: (a) sums described in the company's records as "dividends" were unlawful and recoverable because there were no distributable profits or, in Richard Robbins's case, no shareholding; and (b) various payments described as "remuneration" or "wages" in 2009 were challenged as unlawful distributions of capital because there was no properly authorised resolution or minute under the Articles and the Companies Act.
• A two-day trial before Chief Registrar Baister resulted in findings that some payments recorded as wages were lawful remuneration (authorised by the sole shareholder under Article 8.1 despite non-compliance with Article 8.2, validated by reference to Duomatic considerations) while payments recorded as dividends were unlawful and recoverable; liability to repay an unexplained £10,092 was reserved and then treated in favour of the directors by the Chief Registrar. The joint liquidators appealed to Mr Justice Norris; the directors filed a late respondent's notice seeking to uphold the Chief Registrar's decisions.

Issues framed by the court:

• Whether non-compliance with Article 8.2 of the Articles invalidated decisions taken by the sole shareholder under Article 8.1;
• Whether the Duomatic principle could validate the defective procedure in these circumstances;
• Whether particular payments were properly characterised as remuneration or unlawful dividends; and which payments, if any, must be repaid; and
• How the evidential burden operates in liquidators' recovery claims and whether s.1157 Companies Act 2006 relief could excuse repayment of unlawfully received sums.

Courts reasoning and conclusions:

• On construction of the Articles and the Act, Article 8 should be read as incorporating s.357 with modification; s.357(5) demonstrates that failure to comply with the procedural recording requirement does not affect the validity of the decision. Accordingly non-compliance with Article 8.2 did not invalidate the sole shareholder's decision under Article 8.1 and the Chief Registrar's conclusion that payments recorded as wages in 2009 were authorised was upheld, although the judge reached that result by different reasoning.
• The Duomatic principle was discussed but was not required to validate the payments once the Articles were properly construed. The court emphasised that the primary purpose of the minute requirement was to inform directors of the shareholders decisions and not to protect the sole shareholder.
• Payments recorded and paid as dividends were unlawful where there were no distributable profits or where the recipient had no shareholding; such unlawful dividends could not be recharacterised as remuneration or saved by an unjust enrichment/quantum meruit approach because of the principle that directors may not make unauthorised profits (relying on Guinness and related authorities).
• On the bank-statement discrepancy of c. ,092, the court held that once payment from the company to the directors is shown, the evidential burden lies on the directors to explain the payment; here they did not discharge that burden and therefore must repay that amount. Section 1157 relief could not be used to permit retention of unlawfully received distributions.

Wider context:

• The judgment illustrates limits to informal authorisation by a sole shareholder, clarifies the construction of Article 8 in light of s.357, confirms the strict treatment of unlawful dividends and reinforces the evidential principles applied when liquidators seek to recover company assets from directors.

Appeal allowed in part. The court held that (1) non-compliance with Article 8.2 did not invalidate a sole shareholder decision under Article 8.1 and therefore the 2009 payments recorded as wages were not recoverable by the liquidators; (2) payments recorded and paid as dividends were unlawful where there were no distributable profits or no shareholding and were recoverable; and (3) unexplained payments shown on the companys bank statements of ,092 had not been satisfactorily explained and therefore had to be repaid; s.1157 could not be used to validate retention of unauthorised distributions (consistent with Guinness).

Appeal from the decision of Chief Registrar Baister following a two-day hearing before the Chief Registrar; no prior neutral citation for the first-instance decision is stated in the judgment.