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This was an appeal of a decision of Chief Registrar Baister.
Dean and Richard Robbins were directors of a company which entered Creditors Voluntary Liquidation in February 2011. Dean Robbins was the sole shareholder. It appears that the Company had somewhat basic accounting practices and did not keep detailed books and records. It transpired that, prior to entering Liquidation, the Company had paid substantial sums to the Directors in various instalments, which the Liquidators sought to recover under three separate claims.
The decision of Chief Registrar Baister
The first related to payments totalling £94,000 that the Company had made to the Directors in various instalments listed in the accounting records as "dividends". The Liquidators sought to recover these payments on the basis that the dividend payments were unlawful, because the Company did not have sufficient distributable profits necessary to make such payments, and had also failed to file its accounts in accordance with the Companies Act. The Registrar agreed and the Directors were ordered to pay the entire amount to the Liquidators at first instance.
The second claim related to payments the Company had made to the directors in 2009, totalling around £50,000, which were described in the accounts as "remuneration" or "wages". The Liquidators sought to recover these payments as unlawful distributions of capital, on the grounds that as the Directors did not have written employment contracts, formal resolutions authorising the payments were required. No such resolutions had been made, and the Liquidators maintained that the simple fact of payment by a company with only one shareholder was not enough to validate the payments.
The Chief Registrar dismissed this second aspect of the claim. He held that although the Directors had not followed the form prescribed by the Company's articles (which were the Model Articles), the payments were lawful. Several reasons were given, but essentially it was held that shareholder approval had been given by the course of conduct and that as per the Duomatic principle this ratified the payments. The Directors had been allowed to keep these payments.
The third claim was for the recovery of £10,000 - that had not been recorded at all in the accounts - on similar grounds to the second claim. The Directors argued that this £10,000 related to wages so should not be recoverable. The Chief Registrar at first instance held that despite a considerable lack of evidence, he would give the "benefit of the doubt" to the Directors' version of events, and held that they were entitled to keep these monies.
The Liquidators appealed against the second and third findings; the Directors filed a cross-appeal against the first. The Appeal Judge considered both appeals.
The Appeal Decision
The Directors' cross-appeal was dismissed. The Judge noted that the Directors had attempted to rely on the recent decision in Global v Hale in making their case, which was that the payments made to the Directors were not in fact dividends at all but remuneration. This line of reasoning was not accepted, and the Judge instead adopted the approach of Guinness v Saunders, which effectively established the principle that a director may not make an unauthorised profit out of his position and that this would override any unjust enrichment claim the directors might have against the Company.
As to the Liquidators' appeals, the second claim (for the £50,000) was dismissed - although for different reasons from the Registrar. Rather than relying on the Duomatic principle, the judge found that the validity of a decision of this nature was not dependant on compliance with the formal requirements set out by the relevant article (Article 8.1 of the Model Articles).
The judge allowed the third appeal. With regard to the payments totalling £10,000 the Chief Registrar had considered that in the absence of clear evidence, the burden of proof had shifted to the Liquidators once the Directors had given an explanation for the payments. Although the Directors' explanation had been basic and unsupported by evidence, the Chief Registrar held that this had been enough to shift the burden back to the Liquidators to show why it was unsatisfactory.
The Judge disagreed with this finding. With regard the burden of proof, the Judge held that the "benefit of the doubt" should not have been given to the Directors but to the Liquidators - or in other words, the Directors' explanation had simply not been good enough to discharge their burden of proof. The Judge cited the decision in Guinness v Saunders and the principle that a director may not make an unauthorised profit from a company by virtue of his position. With this principle in mind, it was held that, in the absence of clear evidence to the contrary, the court should give the benefit of the doubt to the Liquidators and assume the payments were not authorised. It was therefore ordered that the payment of £10,000 should be returned to the Liquidators.
It has long been expected that the controversial decision in Global v Hale would be questioned. This is the second case to consider it in some detail, and as expected, it has rejected its line of reasoning.
Global was a case where a director received most of his income as dividends rather than as salary and continued to do so even when there was insufficient profits to pay dividends. The Judge decided the company would have been unjustly enriched if the director was not paid for his work but, crucially, was not referred to the decision in Guinness vs Saunders. The Global decision has been appealed and the appeal listed for October.
Nevertheless, it is encouraging to see that courts have preferred to uphold the principle established in Guinness v Saunders in reaching decisions on unlawful dividends and misfeasance claims, and it would appear that this authority remains good law regardless of the decision in Global.
This case will also be useful authority in establishing where courts should, when considering the burden of proof, give the "benefit of the doubt" to Liquidators rather than directors when there is a lack of evidence.