The decision in Corporate Global v Hale had caused consternation in the insolvency profession for holding the decision that payments made to the director during the course of the financial year did not give rise to a claim for repayment as unlawful dividends if there had been no settled intention at the time on the part of the director as to how those payments were to be categorised.
This case involved the familiar scenario in which a director draws payments from the company on a monthly basis. At the end of the year, the company’s accountants would advise whether those payments could be treated as dividends, remuneration or, perhaps, a loan.
In this first instance decision, claims were made that the payments were potentially transactions at undervalue, preference, paid in breach of duty or by misfeasance and were unlawful dividends. All claims were dismissed.
An appeal was issued only against the latter issue, namely that the payments represented an unlawful dividend.
The Court of Appeal analysed very carefully the judge’s decision and the evidence put before him. There was no doubt that the payments were declared to HMRC as interim dividends. The error the judge made was to look at the mind of the director when those payments were made rather than the strict factual basis surrounding the payments. As a matter of fact, the procedures in the Companies Act were not followed at so, at the time the payments were made, they were unlawful dividends. The fact that director might be open to those payments being re-categorised at the end of the year upon the advice of the accountants was not relevant. What mattered was that, as an issue of fact, those payments were unlawful as there was no compliance with the Companies Act provisions.
The liquidator’s appeal was allowed.
This has to be welcome clarification and a restoration to what many would have perceived to be the correct position, i.e. if the correct procedures are not followed at the time and the circumstances are such at the time that the payment cannot properly be made, that renders the distribution as unlawful.