Blog: All ‘Hale’ the Court of Appeal



Alan Meek

Alan Meek, a partner in Morton Fraser’s corporate team, delves into the consequences of the Court of Appeal case that brought into question the status of a director’s interim dividends when a company goes under

 

At the end of November this year, the Court of Appeal gave its decision in the case of Global Corporate Limited v Dirk Stefan Hale. This was an appeal from the decision of HH Judge Paul Matthews in 2017.

The earlier decision had been the subject of considerable adverse comment and has now been overturned by the Court of Appeal. 

This case arose from very routine and banal facts.

Mr Hale was a businessman who took his money out of his company in the same way as countless other director/shareholders. In common with many other companies, matters were organised in such a way as to minimise the amount of tax payable on money taken out of the company by the director/shareholder.  Each month, Mr Hale procured that the company would pay him a sum of money and each month he signed off on paperwork indicating that the money that he had received was an interim dividend. At the end of the year, when the final accounts were produced, everything was tidied up nicely and there was no problem. 

However, prior to its liquidation, the company had ceased to make profits and the last annual accounts (which were for the period to April 2014) did not show sufficient distributable profits to justify the declaration and payment of dividends to cover the £23,511 that had been paid to Mr Hale in the 16 months prior to liquidation.  No final accounts were produced for the company to reflect its last year of trading and there were no relevant accounts for the period. Following the liquidation in November 2015 , steps were taken to recover the sums that Mr Hale had received on the basis that they were unlawful dividends.

At first instance, the court found that Mr Hale knew enough about dividends to have been aware that a company could not lawfully declare dividends unless there were sufficient distributable reserves. Therefore, each month (despite the signed dividend paperwork) he had not intended to declare  dividends at all (he couldn’t have intended that because he knew it would have been unlawful to do so). And so, whatever the payments were, they were not properly to be considered dividends, and if they were not dividends, they could not be unlawful dividends.

Instead, the court found that the company had declared dividends only “provisionally”. Whether or not these “provisional dividends” became real permanent dividends would be decided at a later point when the year end position was established.

That felt unsatisfactory to many. 

The Court of Appeal has taken a much more straightforward position. It has decided that when it looked like Mr Hale had declared dividends, that was because he had declared dividends. As the company had insufficient distributable reserves at the relevant times, those dividends were therefore unlawful.

Interestingly the Court of Appeal noted at some length that the judge at first instance, had indulged in a line of questioning that effectively led Mr Hale by the nose to give evidence consistent with the idea that the payments were only “provisional” dividends.  Notably Mr Hale was not represented by a lawyer in court. If he had been it is likely that the judge would have been far less lenient in his questioning of Mr Hale.  The judge appears to have encouraged Mr Hale to produce evidence that would allow the judge to reach the decision that he did. As LJ Patten in the Court of Appeal put it: “Most of the questions are highly leading and even when Mr Hale responded negatively to the questions the judge persisted.”

The Court of Appeal decision in this case is to be welcomed for treating this matter with a large dose of common sense.

If a dividend declared when there were insufficient distributable reserves is not an unlawful dividend merely because the director would have known that such a dividend would be unlawful, it is not easy to see what would constitute an unlawful dividend at all.    The idea that directors could avoid liability  by claiming that, at the time the payments were made, they may have been either one thing or another thing (depending upon subsequent happenings) was a recipe for confusion and was likely to lead to unnecessary uncertainty for liquidators and creditors.

So well done the Court of Appeal.