Burden is on directors to establish payments are justified (Toone and another v Robbins and another)

A case concerning contested remunerations and dividends paid to directors has provided a keen talking point in insolvency and restructuring law. Reuben Comiskey, of Radcliffe Chambers who acted for the successful appellants, underlines the key elements of a decision that now provides a useful waypoint in the handling of liquidation proceedings.

Toone and another v Robbins and another [2018] EWHC 569 (Ch), [2018] All ER (D) 145 (Mar)

What are the practical implications of this case?

The main practical implication is that the cross-appeal depended on a decision of HH Judge Matthews from 2017, Global Corporate Ltd v Hale [2017] EWHC 2277 (Ch), [2017] All ER (D) 50 (Sep).

This decision received significant attention at the time, because Judge Matthews dismissed a claim for dividends on the basis that even if the dividends had been formally declared (which he held they had not), the director was in any case entitled to recover some form of payment for work done for the company—even if he was not formally entitled to remuneration. The director was, moreover, entitled to set off that recovery against the dividend claim.

This was substantially the same argument advanced by the respondents on the cross-appeal in this case, where Mr Justice Norris declined to follow Global Corporate on the basis that it was contrary to long-standing House of Lords authority. To the extent that the decision in Toone held that the decision below that payments were ‘dividends or purported dividends’, it is on its own facts.

It does, however, go further in the statement that there is no room for an unjust enrichment or quantum meruit argument on the part of a defendant director, and that a distribution described as dividend but actually paid out of capital is unlawful, however technical the effort. To this extent, therefore, it is a clear statement that the Global Corporate decision is wrong.

The case also provides a reminder that where a director has received payments from a company, the burden is on the director to establish that the payment was justified, and not on the company (or office-holder) to show that it was not.

What was the background?

Directors had made payments shown in the management accounts as remuneration. These payments had all been made in 2009, and totalled over £40,000. Bank statements showed that during the same period the directors had in fact received a sum in excess of £50,000.

The subsequently-appointed liquidators sought to recover these payments on the basis that nothing in the books and records showed that this remuneration had been properly authorised by the company (and, in the case of the surplus £10,000, this was completely unexplained). In 2010, further payments, described as dividends, were made, which we were seeking to recover as an unlawful dividend.

What did the court decide?

At first instance the liquidators were successful with those dividends which the directors were arguing were in fact remuneration, but which the chief registrar held were indeed dividends. In respect of the remuneration, the liquidators were unsuccessful for two reasons. The first was that the Duomatic principle applied (Re Duomatic Ltd [1969] 1 All ER 161), so that those payments appearing in the records were adjudged to have been properly authorised.

For the balance that did not appear on records, it was the chief registrar’s conclusion that the liquidators had not satisfied the burden of proof to demonstrate that it was an unlawful remuneration payment. The liquidators appealed, and the directors in turn cross-appealed. This was heard by Mr Justice Norris, and he dismissed the appeal in relation to the remuneration that formed part of the company’s records, holding again that they had been properly authorised. He allowed the liquidators’ appeal in relation to the balance, and dismissed the cross-appeal.

The decision that Global Corporate was wrong is not entirely ground-breaking. Many, including myself, were always of that view, in part because two authorities—one of the Court of Appeal and another of the House of Lords—were not cited to Judge Matthews in that case. What Toone now does is to make plain what was previously only presumed. To date, registrar Barber (now Insolvency and Companies Court judge Barber), had expressed her concerns as to whether or not that case was correct (in Ball v Hughes [2017] EWHC 3228 (Ch), [2017] All ER (D) 90 (Dec))—now that a High Court judge has disapproved it, matters will become clearer for practitioners.

The final element is that the decision reiterates what seemed clear, but not clear enough. The case places the burden of proof on directors to show that, where they have dealt with the companies’ money, they have done so properly. At first instance the chief registrar had said there was a shifting burden, so that the director had to provide an explanation that a liquidator had to disprove. Now we are in a position where the director not only has to come up with an explanation but to prove its accuracy.

The cross-appeal itself could not have happened without the controversial Global Corporate decision. A much clearer state of affairs has thus been established and, while not revelatory, the decision in this case will stop a glitch in the law from taking hold.

Further reading

If you are a LexisPSL subscriber, click the links below for further information on order of payments in administration:

Bringing a claim on behalf of an insolvent estate or its insolvency office-holder—overview 

Recovery of unlawful dividends by an insolvency office-holder (Subscriber access only)

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First published on LexisPSL Restructuring and Insolvency

Interviewed by Julian Sayarer.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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