Contributors
Toone v Robbins 2018 [EWHC] 569 (Ch)
The lessons to takeaway
Directors who are also shareholders need to be careful when arranging how to take payments from a company. For tax reasons, dividends can be perceived to be an attractive way to take cash out of a company, but if there are insufficient distributable reserves, such payments are unlawful and can be clawed back.
If a company enters into an insolvency process, such payments are likely to come under close scrutiny. If dividend payments are challenged, inadequate record keeping is likely to compound the problems for directors and shareholders. The Court will look at all the evidence to establish the true nature of payments. Where the evidence about the nature of the payments is particularly unclear, the directors will find it difficult to justify retaining the payments.
If directors who are shareholders wish to declare a dividend payment, they should ensure that it is demonstrably lawful and keep a careful record.
The facts
Dean and Richard Robbins were directors of a furniture company, Pinetum Limited. On 23 February 2011, Pinetum entered into liquidation. In a story that will sound familiar to many insolvency practitioners, Pinetum's records left a lot to be desired. It had a Sage accounting system on which were separate journals for wages and dividends. Not all payments out of Pinetum's bank account found their way in to the management accounts. The Company had paid £185,216 to the Directors during the months that it traded before entering into liquidation. The liquidators sought to recover the payments as unlawful dividends (as the company had no distributable profits). The directors argued that they were disguised remuneration.
The Chief Registrar found that the payments made and described as "dividends" were indeed dividends. He relied on the following:
- Their description in the Company's own books and records (and in particular that the 1st February 2010 payment of £19,000 had originally been entered as "wages", but the entry had been reversed and a new entry made in the "dividends" journal).
- The failure to deduct PAYE or NIC from the payments.
- The fact that they were round sums to which Dean Robbins had referred in oral evidence as "provisional dividends", which suggested that they were distributions on account of anticipated dividends.
- The declaration of Dean Robbins in his tax return of the receipt of dividends in the sum of £26,666 gross (inclusive of associated tax credit).
- The original defence of the Directors (maintained both by their accountants and their solicitors) that the payments were lawful dividends.
When judgment was handed down there arose an issue about £10,098 which was not was attributed in the Sage records to the "wages" journal and which was uncategorised. This was one of the issues on appeal.
Section 357 (2) of the Companies Act 2006 provides:
"Where the member takes any decision that (a) may be taken by the company in general meeting and (b) has effect as if agreed by the company in general meeting, he must …. provide the company with details of that decision".
Article 8 of the Company's articles incorporated (with a small modification) that provision into the contract between the Member and the Company. The problem is that the formality set out in Article 8.2 was not observed.
The Chief Registrar held that this failure did not (on the facts) mean that the money paid to the Directors and labelled "workers' wages" was unauthorised. He found that Directors intended that they should be remunerated, and that a contract between each of them and the Company had come about by performance or a course of conduct. Under that contract they were "entitled" to be paid. He permitted the directors to retain the sum of £10,098, applying Re: Duomatic Ltd [1969] 2 Ch 365 and 373 C and decided that, where it can be shown that all the shareholders who have a right to attend and vote at a general meeting of the Company assent to some matter which a general meeting of the Company could carry in to effect, that assent is as binding as a resolution in general meeting would be.
The appeal decision
On appeal, Mr Justice Norris ordered the directors to repay the sum of £10,092.
At first instance, the Chief Registrar had decided that in the absence of clear evidence one way or the other he had to decide the matter on the burden of proof. Mr Justice Norris determined that once the Chief Registrar had done so, the benefit of any doubt had to be given to the Joint Liquidators (not to the recipients of the company's money). This is entirely in accordance with the principle set out in Re: Idessa (UK) Ltd [2011] EWHC 804 (Ch).
Directors who receive money from a company cannot be heard to say:
"We have received company money: but our record keeping is so bad that the basis upon which we received it is unclear. So by reason of our defaults we ask you to assume in our favour we took the money lawfully."
The director may have agreed that he and his brother should be remunerated. He may have authorised the payment of company money in the sense that he signed the cheque or gave the relevant payment instruction. However, the mere fact that some lawful payment could be made does not mean that this specific payment was lawful.
Applying the decision of Guinness v Saunders [1990] 2 AC 663, the directors could not be excused from paying back the money (even if they could have been fairly excused for receiving it in the first place).
