To no great surprise, the Global Corporate v Hale appeal decision has gone against the director. The Court of Appeal handed down the eagerly awaited judgment on 27 November 2018.
Our previous article covered the issues arising from the first instance decision of HHJ Matthews. That decision concerned payments made to a director of a company which were neither properly authorised remuneration, nor valid dividend payments, and which the applicant (who had taken an assignment of the claim) asserted were repayable. However, the payments were not found to be repayable on the basis that the director had his own quantum meruit claim against the company which should be taken into account.
The appeal decision is critical of the initial finding that the monthly dividend payments were either based on provisional decisions to declare dividends, or alternatively, when it subsequently became apparent that a dividend would not have been possible, it was somehow possible to reclassify them. In particular, the appeal judgment criticises the first instance judge's leading questioning of the director during his evidence, calling it "inappropriate" as well as considering that his findings were not part of the Defendant's pleaded case at all.
The appeal decision is clear that from the available evidence, the payments were structured specifically as dividends for tax purposes and were explicitly described as interim dividends.
On that basis therefore, given the company's financial position as at the date of the payments, the appeal confirms that the distributions could not have been lawful distributions.
The appeal judgment goes on to expressly state that a subsequent realisation that the dividends should not have been paid would not allow these to be treated in an alternate way. This may well be helpful to office holders who will routinely encounter companies where dividends have been paid on an "on account" basis.
The appeal judgment then goes on to consider the quantum meruit claim for services the director had provided to the company. As discussed at our seminar, the problem with this decision is that it ran contrary to the understood position arising from the House of Lords decision in Guinness v Saunders, which is that a trustee cannot profit from his position except when properly authorised. In the corporate context, this means that payments to directors must be either lawful distributions or properly sanctioned according to the company's articles.
Therefore the appeal judges rejected the possibility of a quantum meruit claim by the director. In fact, the leading judgment went further and said that even if there was the possibility of a quantum meruit claim, it would not be available for set off against the repayable distributions, on the basis that those distributions were not lawful payments.
A further point to note is that while the appeal judges expressed their understanding of the difficulties for trial judges when one party is represented and one is not, they considered it a matter of some importance that a trial judge in such circumstances does not go beyond the requirement to be fair to all and in doing so, overcorrect any perceived imbalance.
Insolvency Practitioners will welcome the robust appeal judgment handed down and the confirmation that directors acting in a fiduciary capacity must ensure that they only benefit from their position in a lawful or properly authorised way, and that having taken funds on one basis for a particular reason that benefitted them at the time, it is not open to them to seek to reclassify in a more favourable way subsequently.