Owner director entitled to payments of dividends before liquidation, rules High Court

Out-Law Legal Update | 19 Oct 2017 | 11:59 am | 2 min. read

LEGAL UPDATE: The High Court has decided that receipt of dividend payments won't necessarily be challengeable if these sums can be re-categorised as adequate remuneration for services provided to the insolvent company. The case is also a cautionary tale of ensuring assignments of claims are drafted as widely as possible. 

Powerstation UK Limited had been in financial trouble since 2008 and entered liquidation in 2015. Global Corporate Limited purchased the claim against Dirk Hale, a shareholder and director of Powerstation. During the period in the run up to insolvency Hale paid himself a combination of salary and dividends based on advice received from Powerstation's accountant. He took £1,383 per month in addition to his nominal salary, signing dividend tax forms each month. At the end of each financial year other than the final year of trading Powerstation's accountant would consider the finances of the business and decide whether the £1,383 could be categorised as dividends or whether it would be declared as PAYE earnings and additional payments made to HMRC.

Global claimed that the payments were unlawful as they were in breach of section 830 of the Companies Act 2006 which says that distributions should be made only out of profits available for the purpose, and that Hale knew this and was therefore liable to return the payments under s847 of the Act . In addition to this, Global said the activity also amounted to a transaction at an undervalue and/or a preference, and that payments were as a result of misfeasance by Hale.

The High Court ruled that Powerstation did not declare and pay a dividend every month, despite the dividend forms being signed. Instead the director took a decision to declare and pay a dividend which would be reviewed at the end of the year. This was on the advice of Powerstation's accountant and Hale had simply followed the accountant's advice and he didn't know nor intended to be in breach of section 830 of the Companies Act.

As these payments were never dividends no liability arose under section 847. Hale had provided a service to Powerstation which he was entitled to be paid for. If he had not provided this service someone else would have been required to have been employed and paid for the work. On this basis the judge held that Powerstation would have been unjustly enriched if Hale hadn't been paid the £1,383 a month in addition to his nominal salary and that this level of remuneration was not excessive in the circumstances. He said there had been no breach of duty, misfeasance or transaction at undervalue as the payments were remuneration which Hale was entitled to in exchange for his services.

The judge did not consider whether the payments could be challenged as an unfair preference. Global had not acquired the right to bring a preference claim, which remained with the liquidators. As the liquidators were not party to the proceedings the court was not prepared to consider whether or not there was a preference. It would have been interesting to have established the judge's position on this but for the technicality which prevented it from being considered in this case.

It is not clear whether the case will be appealed but either way it is likely that this case is limited to its facts as the circumstances here are not common. It is worth noting that Hale represented himself in the action, a point which the judge noted and expressed his slight dismay over given how technical the area of law before the court was.

Ainslie Benzie is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com