Global Corporate Ltd v Hale, Court of Appeal - Civil Division, November 27, 2018, [2018] EWCA Civ 2618

Resolution Date:November 27, 2018
Issuing Organization:Civil Division
Actores:Global Corporate Ltd v Hale

Case No: A3/2017/2799

Neutral Citation Number: [2018] EWCA Civ 2618




Bristol District Registry


[2017] EWHC 2277 (Ch)

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 27 November 2018

Before :





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Between :

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Mr Lawrence McDonald (instructed by Seth Lovis & Co Solicitors) for the Appellant

Mr Crispin Hayhoe (instructed by Simon Burn Solicitors) for the Respondent

Hearing date : 25 October 2018

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JudgmentLord Justice Patten :

1. This appeal concerns the status of various payments, amounting in total to £23,511, which the Respondent, Mr Hale, received between 24 June 2014 and 26 October 2015 from a company called Powerstation UK Ltd (``the Company'') of which at the time he was both a director and shareholder.

2. On 25 November 2015 the company was placed into creditors' voluntary liquidation. Its estimated statement of affairs indicated that there was a deficiency of some £173,594.99. The Company's internal documentation indicated that the payments were made as dividends. The liquidators took the view that as such they had been paid unlawfully because at the relevant time the Company, according to its last annual accounts, had insufficient distributable reserves of profits out of which the dividends could have been paid in conformity with s.830 of the Companies Act 2006 (``the CA 2006''). Accordingly they wrote to Mr Hale on 3 August 2016 requiring repayment of the £23,511.

3. No repayment was made. On 25 August 2016 the liquidators assigned their rights to receive the monies either as unlawful dividends or as transactions at an undervalue to the appellant, Global Corporate Limited (``Global''), and on 20 September 2016 Global issued an application against Mr Hale seeking declarations that the £23,511 was recoverable either as unlawfully paid dividends; or as a transaction at an undervalue and/or a preference; or on the basis that the payments were made in breach of Mr Hale's fiduciary duties to the Company as a director and therefore amounted to misfeasance. The application also sought repayment of the monies.

4. The application was supported by a witness statement from Mr Michael Hartley of Global setting out from the available information what he knew of the circumstances in which the payments had been made. This included a schedule showing that on 24 or 26 of each month beginning on 24 January 2014 and ending on 26 October 2015 Mr Hale received a payment of £1,383. Each of the payments was recorded as an ``interim dividend'' in respect of the Company's current financial year ``at the rate of £69.15 per share on the ordinary shares registered in your name'' in a ``dividend tax voucher'' prepared by the Company's accountants and signed by Mr Hale. These documents were presented to HMRC and Mr Hale and his co-director and shareholder, Mr Richard Benton, were assessed to tax accordingly.

5. In his witness statement Mr Hartley said that the Company had been balance sheet insolvent since 2009 and that its financial position had deteriorated further during 2014 and 2015. At the time the disputed payments were made the last annual accounts for the year ended April 2014 indicated that there were insufficient distributable reserves to support the payment of the £23,511 as dividends and the payments to Mr Hale and Mr Benton had increased the losses to the Company. The notes to the accounts stated that the Company continued as a going concern only with the support of its directors.

6. Mr Hale has made two witness statements in the proceedings. In the first (dated 9 December 2016) he explained that the Company operated a vehicle tuning centre which he had previously run in partnership with Mr Benton. They had worked long hours in the business for many years and had never sought to take excessive remuneration from it. The Company had been badly affected by the global financial crisis and subsequent recession to the point where HMRC was seeking personal guarantees from the directors in respect of its future tax liabilities. At this point he and Mr Benton decided that they could no longer support the Company financially and that there was no alternative to liquidation.

7. In relation to the claim for repayment of the £23,511, Mr Hale accepted that the Company was balance sheet insolvent but denied that he had ever caused it to trade insolvently. Tax and other liabilities were discharged out of trading receipts and profits. As regards the dividends, he denied that they had been paid unlawfully:

``10. ... Richard and I had taken advice from our accountants some time ago as to how best we should deal with remuneration for ourselves as we were both officers, shareholders and employees of the Company. Our accountant calculated that we should look to take £456 through PAYE to ensure that our National Insurance contributions were made in full, and then take £1,383 as a dividend each month. This structure was adopted by us as a more tax efficient way of dealing with our remuneration and it was honestly recorded in our accounts.

11. At the end of each financial year, we would send our books to our accountant and he would review them. If it appeared that there were not sufficient distributable reserves to justify the dividends taken, he would reverse those dividends and the Company would pay the necessary tax. Indeed this is what had occurred in the two financial years prior to the 2015/2016 financial year.

12. Due to the decision to put the Company in to voluntary liquidation, the Company ceased to trade part way through the 2015/2016 financial year. Had the Company traded until the end of the financial year, our accountant would have reviewed the books as usual making any necessary adjustments before our year end accounts were prepared.''

8. In a second witness dated 9 June 2017 Mr Hale again addressed the allegation that the Company may have traded insolvently and made the point that from 2012 onwards an increase in turnover and gross profit had reduced the debits on the balance sheet. But there is nothing further of substance about the basis on which the dividends were paid. What he says (in [4]) is that the laws relied on by Global in the present proceedings were not intended for ordinary owner directors ``who took dividends on the advice of their accountant in order to more efficiently manage their income''.

9. The Company's accountants did not provide a witness statement for use in the proceedings but they did write a letter dated 27 July 2017 which was relied on by Mr Hale as part of some submissions made after the trial. The letter says that the practice of paying a low salary and dividends is commonplace in small companies and that ``the occasional reversal of such is just restructured management adjustments''. The letter includes a statement that the directors did not ``knowingly receive dividend payments'' that they considered to be unlawful and that the dividend payments made after April 2014 could be justified by reference to interim accounts. It is now common ground between the parties that there were no such interim accounts during the...

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