Jones v The Sky Wheels Group Ltd

Periodic drawings made by directors and shareholders as advances against anticipated dividends cannot ordinarily be re-characterised as remuneration when repayment becomes inconvenient, particularly where they were presented to HMRC as dividend-related payments. A statutory demand may nevertheless be disputed on substantial grounds where the debtor has an arguable equitable expectation that repayment will not be demanded until the company has properly considered whether to declare a dividend. An arrangement for future set-off does not, without more, create an equitable charge. The residual power to set aside a statutory demand is constrained by relevant legal principles, but may be exercised where insolvency proceedings are being used for an illegitimate collateral purpose and it would be unjust to allow them to proceed.

The Company appealed against the decision of Deputy District Judge Watkin dated 18 June 2019, which set aside a statutory demand for £418,609.28 served on Christopher Stephen Jones in respect of his alleged overdrawn director’s loan account.

The dispute concerned the character of monthly drawings, whether the alleged debt was genuinely disputed, whether the Company held security over future dividends or share-sale proceeds, and whether the statutory demand should be set aside because bankruptcy proceedings were being used to forestall Mr Jones’s petition under section 994 of the Companies Act 2006.

1. Appeal dismissed. The statutory demand was properly set aside.
2. The monthly drawings of £8,250 were advances against anticipated dividends and remained debts due to the Company. They could not be re-characterised as remuneration merely because the recipient later wished to assert an entitlement to payment. That conclusion was reinforced by the way the arrangements had been presented to HMRC for PAYE and NIC purposes. The claimed unpaid remuneration therefore did not amount to a sufficient cross-claim under IR 10.5(5)(a).
3. There was no sufficiently certain contractual agreement that the loan-account debts would never become repayable unless dividends were declared. Informal agreements may be binding, as illustrated by Paul v Constance [1977] 1 W.L.R. 527 and Re Duomatic Ltd [1969] 2 Ch 365, but certainty of terms and an objective meeting of minds are required.
4. However, the evidence gave Mr Jones substantial grounds for asserting a legitimate expectation, enforceable in equity under section 994, that the Company would consider in good faith whether to declare dividends before demanding repayment. The apparent refusal to consider dividends, followed by an immediate demand, was capable of amounting to unfair prejudice. The debt was therefore disputed on substantial grounds under IR 10.5(5)(b).
5. No equitable charge existed. The principles approved in Swiss Bank Corp v Lloyd’s Bank [1982] AC 584, drawing on Palmer v Carey [1926] AC 703, require appropriation of a fund or asset and a specifically enforceable right of recourse to it. The arrangements concerning future dividends and share-sale proceeds created, at most, a right of set-off. They did not confer a security right. IR 10.5(5)(c) therefore did not apply.
6. The discretion under IR 10.5(5)(d) is broad but not unfettered. It requires a substantial reason comparable to the reasons in paragraphs (a) to (c), including circumstances making it unjust for the statutory demand to produce bankruptcy consequences. The Company’s unexplained change from threatened Part 7 proceedings to bankruptcy proceedings, in the context of Mr Jones’s threatened section 994 petition, justified setting aside the demand. The bankruptcy process could not properly be used to forestall that petition.

• High Court (Chancery Division): On appeal from the County Court at Manchester, Mr Justice Snowden upheld the decision of Deputy District Judge Watkin dated 18 June 2019 and dismissed the appeal.
• County Court at Manchester: Deputy District Judge Watkin set aside the statutory demand.