Summary

Two company directors were required to repay to joint liquidators payments which they had received from the company which they had failed to demonstrate had been lawfully paid by way of remuneration.

Facts

Two joint liquidators appealed against a decision that the payment of £10,098 to the defendant company directors were not unlawful distributions of the company's capital.

The first defendant was the sole shareholder of the company. Article 8.1 of the company's articles provided that if the company had only one member and that member took a decision which was required to be taken in general meeting, the decision would be valid as if a general meeting had taken place. Article 8.2 provided that a decision taken by a sole member subject to art.8.1 had to be recorded in writing and entered into the company's minute book. The company ultimately entered into a creditors' voluntary liquidation. Its dealings were traceable through both the Sage accounting system and management accounts prepared by the company's accountant. However, not all payments out of the company's bank account found their way into the accounting records. The chief registrar found that some of the payments constituted unlawfully paid dividends which the directors were liable to repay to the liquidators. He found that a further £40,094 sum, which was attributed in the Sage records to the "wages journal", was remuneration that the directors were entitled to keep, even though no entry had been made in the company's minute book, contrary to art.8.2. In respect of the further £10,098, to which there was no reference in the company's records, the registrar said that he would give the directors the benefit of the doubt and treat it as remuneration.

Held

Non-compliance with art.8.2 - The primary purpose of art.8.2 was not to protect the sole shareholder: he knew what decision he had taken and did not need a formal record of it. Nor was it directed to any significant degree to the wider constituency of "stakeholders", such as future shareholders, current and future creditors or potential insolvency office holders. The primary purpose was to ensure that the directors were made aware of the decisions made by the sole shareholder. Against that background, the validity of a decision under art.8.1 was not dependent on compliance with art.8.2. Article 8 was not expressed in conditional terms, and there was no reason why a sole shareholder's decision under art.8.1 should be invalidated when a resolution of a sole shareholder at a formally convened meeting of which due notice had been given would not be invalidated by a failure to comply with the duty to keep records under the s.355 of the Act. Article 8 was the incorporation of the provisions of s.357, with some modifications. Section 357(5) specifically provided that a failure to comply with the section did not affect the validity of the decision. If the draftsman of art.8 had intended that the articles should further modify the statutory provisions, he would have so provided (see paras 29, 31-32 of judgment).

Directors' obligation to account for money taken unlawfully - Section 1157 enabled the court in proceedings for negligence, default, breach of duty or breach of trust to relieve a company officer from liability if it appeared that the officer had acted honestly and reasonably, and if he ought fairly to be excused having regard to all the circumstances of the case. Had it been relevant to his decision, the chief registrar would have relieved the directors of liability under the power conferred by s.1157. However, s.1157 did not enable any misfeasant officer to escape liability for what he had "received". Accordingly, the directors had to repay the £10,098 which they had not demonstrated was lawfully paid to them by way of remuneration, Guinness Plc v Saunders [1990] 2 A.C. 663applied (paras 40-41).

Status of payments labelled as "dividends" - The chief registrar found that the directors had characterised the payments recorded on the Sage accounting system as "dividends" or "purported dividends". However, they could not lawfully be so. In the case of the first defendant, they could not be dividends because there were no statutory accounts and no distributable profits out of which such dividends could have been declared. In the case of the second defendant, he could not receive dividends because he did not hold any shares. The "dividends" which the first defendant contrived to pay to both himself and the second defendant were "unlawful dividends" and recoverable as such. It was not open to the directors to seek to re-characterise the payments as instalments of salary. It did not avail the directors to say that if they were not allowed to keep the "unlawful dividends", the company would be unjustly enriched; nor did it avail the directors to say that there were other routes which the company could have used to transfer its assets to them. Further, it did not avail the directors to say that they had agreed between themselves that they could take the money, and that the sole shareholder had approved of the payments because the company in general meeting could only enter into transactions which were otherwise lawful under the Act. A distribution described as a dividend but actually paid out of capital was unlawful, however technical the error and however well-meaning the directors who paid it, Progress Property Co Ltd v Moore [2010] UKSC 55 followed (para.48).

Appeal allowed