0370 1500 100

Court Of Appeal Clarify Position On Unlawful Dividends And The ‘Quantum Meruit’ Defence

The Court of Appeal has handed down judgment in a recent case establishing when a dividend payment to a shareholder will be unlawful– and when a defence of quantum meruit may be available to the recipient.

The original decision in the case of Global Corporate Ltd v Dirk Stefan Hale [2018] EWCA Civ 2618 has been heavily criticised, as it seemed to give directors/shareholders an easy defence for the repayment of unlawful dividends. That decision has now been overturned by the Court of Appeal.

Case facts

The respondent, Mr Hale, was a shareholder and director of Powerstation UK Limited (“Company”). The Company was placed into creditors’ voluntary liquidation on 25 November 2015. The appellant, Global Corporate Limited, was the assignee from the liquidators of the claim against Mr Hale for the repayment of unlawful dividends.

The liquidators took the view that the dividends paid to Mr Hale were unlawful, as the Company’s last filed accounts showed there were insufficient distributable reserves. These are a requirement for dividend payments under section 830 of the Companies Act 2006.

The witness statement of Mr Hale revealed that at the end of the financial year, the accountant would normally reverse any dividend payment if it appeared there were not sufficient distributable reserves to justify payment of the dividend. The accountants claimed they did not consider the dividend payments to be unlawful.

Judgment

The trial judge found that even though there were no distributable reserves, the payments could be justified on the basis that the director had provided services to the Company. He was therefore entitled to be recompensed for those services – that is, entitled to payment on a quantum meruit basis. That decision provided the director with a full defence to the claim.

The Court of Appeal, overturning the trial Judge, held that the payments were dividends declared and distributed in contravention of section 830.

The Court of Appeal based its decision on the following:

• The payments to Mr Hale were a distribution within the definition of section 829 of the Companies Act 2006 – “every description of distribution of a company’s assets”

• The payments had been recorded in the Company’s records as dividends

• The accountants had believed them to be lawful dividends

• The payments had been expressly declared to HMRC as interim dividends.

In addition, and although not argued in this case, the court discussed the applicability of the set-off or counter-claim of quantum meruit in cases of unlawful dividend payments. The Court of Appeal, applying the House of Lords’ opinion in Guinness Plc v Saunders [1990] 2 AC 663, held the law would not imply a contract of remuneration, as suggested by the trial judge. Instead, payments to directors had to be agreed under a company’s articles of association, which usually requires a resolution of the board.

Accordingly, the Court would not imply a right to payment on a quantum meruit basis. Also, any quantum meruit claim, even if there is one, would be an unliquidated claim for compensation, an unsecured claim, for which a director would have to prove in a liquidation.

Impact for liquidators

This latest judgment assures liquidators that the company will have a cause of action against shareholders where payment is said originally to be dividend, but when it is found to be unlawful, the director tries to characterise it as something else.

In this case, the director/shareholder and their accountant wrongly believed their system of reversing dividends to salary was lawful.

Ultimately, we can all breathe easily again. Converting dividends or directors’ loan accounts to remuneration after the event does not work. Quantum meruit may be a claim in the liquidation, but it will not be able to be used as a defence or set-off to a claim from an administrator or a liquidator.

Learn more about the work of our Restructuring & Insolvency team.

Key Contact

Edward Judge