MANOLETE PARTNERS PLC v PAUL ANTHONY RUTTER & Anor

The court considered claims assigned by the liquidator against the defendant director-shareholders of Rut5 Limited for (1) an alleged unlawful dividend of £560,000, (2) sums said to be owing on the directors' loan account, and (3) company money used to fund works on two properties. Key legal issues were the date on which a "distribution" under s.829 Companies Act 2006 occurred, the application of the Part 23 statutory scheme for lawful distributions (ss.830, 836–838, 847), and the scope of directors' duties including the creditor duty in s.172(3) CA (as explained in BTI v Sequana) and relief under s.1157 CA.

• The judge found on the balance of probabilities that the defendants had decided in July 2016 to declare and allocate a £560,000 interim dividend against their joint directors' loan and that the company accounts of 29 July 2016 recorded that transaction. On that factual basis the court held the "distribution" occurred in July 2016 and was lawful, so the claimant's £560,000 dividend claim was dismissed.
• The court found the defendants ran up personal drawings on the directors' loan of £94,688.12 (reduced by one agreed genuine item to £94,688.12 → adjusted to £94,688.12 in judgment) in the period July–October 2017 which were not company expenditure; set-off by payments made later under personal guarantees could extinguish debt in principle but not where the sum arose from breach of duty; the court found breaches of duty and awarded judgment for the directors' loan sums.
• The court found £30,226.56 of company money was used on 4 Marsh Avenue and £225,852.48 was applied to works at Launde Lodge Farm; those sums were recoverable. The court ordered judgment for those sums, interest and an equitable lien over Launde Lodge Farm for £225,852.48 plus interest.

This was a first instance trial of claims assigned to Manolete Partners PLC by the company’s liquidator against the company's only directors and shareholders (Mr and Mrs Rutter). The liquidator assigned claims alleging an unlawful £560,000 dividend, sums due on the directors' loan account, and that company funds had been misapplied to pay for works at two properties owned by the defendants. Procedural history included earlier interlocutory applications, relief from sanction to admit late statements, and a limited re-opening after the judge's draft judgment so the claimant could address a statutory duty point.

Nature of proceedings and relief sought

• The claimant sought restitution of the alleged unlawful dividend, repayment of sums misapplied from the directors' loan account, and an account and proprietary remedies (including an equitable lien or constructive trust) in respect of company money used on the defendants' properties; it also sought interest and costs.

Issues the court framed and decided

1. Whether the £560,000 reduction of the directors' loan constituted a "distribution" under s.829 Companies Act 2006 and, if so, on what date (31 July 2015, 29 July 2016 or 12 April 2017); whether that distribution (if any) was lawful under Part 23 CA and at common law and whether directors were personally liable.
2. Whether the defendants owed a sum on the directors' loan account (about £104,668.12 claimed; the judge found a net run-up of c.£94,688.12 after adjustments) and whether sums later paid under personal guarantees could be set off against any liability, including where the drawings were in breach of duty.
3. Whether company funds totalling £225,852.48 (Launde Lodge Farm) and £30,226.56 (4 Marsh Avenue) had been applied to the defendants' properties and were recoverable, and what remedies should follow (personal judgment, proprietary remedies).

Court’s findings and reasoning

The judge made detailed credibility findings on witnesses (accepting Langham and Irwin as credible; rejecting much of Mr Rutter’s account) and extensive factual findings from the accounting records and contemporaneous documents. On the dividend issue the judge analysed the statutory scheme in Part 23 CA (ss.829, 830, 836–838, 847), the duty of directors under ss.171–174 and the creditor duty in s.172(3) as explained in BTI v Sequana, and the common law approach to distributions in Progress/ Moore. The judge concluded that the decisive legal and factual transaction was the July 2016 decision and its recording in the 2014–15 statutory accounts (approved 29 July 2016) that allocated a £560,000 interim dividend to reduce the directors' loan. That accounting transaction, recorded in the company accounts and approved by the defendants, constituted a distribution in substance under s.829 CA and was within the Part 23 scheme (the draft/final 2014–15 accounts enabling a reasonable judgment as to distributable profits). Because the company was not insolvent or facing imminent insolvency in July 2016, the creditor duty and common-law unlawfulness principles did not render the distribution unlawful; the dividend claim was dismissed.

On the loan and property claims the judge found on the balance of probabilities that the defendants had used company funds for personal purposes: c.£30,226.56 on Marsh Avenue and £225,852.48 on works at Launde Lodge Farm and had run up personal drawings of about £94,688.12 in mid‑to‑late 2017. The court held those sums were recoverable; set-off by later payments under guarantees could discharge purely contractual debts but could not be relied on to defeat liability for amounts arising from breaches of duty. The judge declined to grant relief under s.1157 CA in respect of the Launde Farm expenditure and ordered an equitable lien over Launde Lodge Farm in the sum awarded to the claimant, with interest and costs. The judgment dealt with alternative legal arguments (ratification/Duomatic principle, unlawful distribution at common law, relief under s.1157) and explained why, on the findings, the defendants were liable on the property and loan claims while the dividend claim failed.

This was a first instance judgment. The court dismissed the claimant’s claim to recover £560,000 as an unlawful dividend, holding that on the facts the distribution occurred in July 2016 (when the 2014–15 accounts recorded and approved the interim dividend and its set-off against the directors’ loan) and was lawful under Part 23 Companies Act 2006 and at common law. The court found the defendants liable to account for misapplied company funds: judgment was entered for the claimant for £94,688.12 (directors’ loan drawings), £30,226.56 (Marsh Avenue) and £225,852.48 (Launde Lodge Farm), ordered interest and costs and imposed an equitable lien over Launde Lodge Farm for the £225,852.48 sum plus interest. Rationale: detailed credibility and documentary findings established the timing and substance of the dividend, separate breaches of duty and misuse of company funds, and the statutory and equitable remedies the court should order.