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

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 remu

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About the author:

Anna joined the Restructuring and Insolvency team at Lexis®PSL in August 2013 from Berwin Leighton Paisner where she was a senior associate in the Restructuring Team.

Anna has worked on a number of large scale restructurings primarily in the UK market acting on behalf of lending institutions.

Recent transactions include the restructuring of a UK hotel chain and the administration sale of part of the Connaught group. Anna has also spent time on secondment at The Royal Bank of Scotland and trained at Clifford Chance qualifying in 2007.