MANOLETE PARTNERS PLC v PAUL ANTHONY RUTTER & Anor

A distribution under Part 23 of the Companies Act 2006 may occur through a genuine accounting transaction which allocates a dividend to reduce shareholder-directors’ loan indebtedness. It need not await a later internal ledger entry or movement of cash. The court examines substance, statutory context and the company’s formal accounts.

Directors who continue substantial personal expenditure through a directors’ loan account during a cash-flow crisis may breach duties of care, promotion of the company’s success, independent judgment and creditor interests. Where the company is insolvent, or insolvency is imminent or an insolvent administration is probable, creditor interests must be given appropriate weight. A later payment under a company guarantee may set off a debt claim, but not liability for breach of duty.

The claimant, to whom liquidator claims had been assigned, sued the company’s former directors and shareholders. It claimed repayment of a £560,000 dividend, sums drawn through the directors’ loan account, and expenditure on the defendants’ properties which had been charged to the company.

The principal legal issue was whether the dividend was distributed when the defendants decided in July 2016 to declare and allocate it against their loan account, when the transaction was recorded in the 2014–15 accounts, or when the accountant entered it on the company’s Sage ledger in April 2017. Further issues concerned directors’ duties, set-off, breach of trust and an equitable lien.

1. Dividend claim dismissed. The court found that the defendants decided in July 2016 to declare a £560,000 interim dividend and use it to reduce their directors’ loan debt. The transaction was recorded in the 2014–15 accounts approved on 29 July 2016. The later Sage entry was an accounting correction.
2. Under s.829 of the Companies Act 2006, “distribution” has a wide factual meaning. A genuine allocation of a dividend against a shareholder-director’s debt may be a distribution of company assets whether or not cash changes hands, and whether or not a later accounting entry is made. The court must examine substance rather than merely form, while giving proper weight to the statutory scheme and formal accounts.
3. The July 2016 distribution was lawful. The 2014–15 accounts, or alternatively the draft accounts treated as interim accounts, provided sufficient distributable profits under ss.830 and 836–838. The company was not insolvent, nor was insolvency imminent, at that date. The defendants could rely on their accountant’s advice and, in any event, relief under s.1157 was available.
4. Had the distribution occurred in April 2017, the 2015–16 accounts would not have supported it and the defendants would have known of the statutory and common-law difficulties. That conclusion was academic because the distribution occurred in July 2016.
5. The defendants incurred £94,688.12 of personal expenditure through the directors’ loan account between July and October 2017. This breached s.174 and, alternatively, ss.172(1), 173 and 175 of the Companies Act 2006. By July 2017 the company was balance-sheet and cash-flow insolvent, or insolvency was imminent and administration probable, so the creditor duty under s.172(3) was also breached. Payments made under guarantees could set off the debt claim, but not the breach-of-duty liability.
6. The defendants used £30,226.56 of company money on Marsh Avenue and £225,852.48 on Launde Lodge Farm without accounting for it. Judgment was entered for those sums. The court ordered an equitable lien over Launde Lodge Farm for £225,852.48 plus interest.