Richard Toone & Kevin Murphy v Dean Robbins & Richard Robbins
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 20 March 2018 |
| Neutral Citation | [2018] EWHC 569 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH-2017-000211 |
| Date | 20 March 2018 |
[2018] EWHC 569 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES (CHD)
CHANCERY APPEALS (CHD)
Royal Courts of Justice, 7 Rolls Building
Fetter Lane, London, EC4A 1NL
THE HONOURABLE Mr Justice Norris
Case No: CH-2017-000211
Reuben Comiskey (instructed by PDT Solicitors) for the Appellants
Caley Wright (instructed by Trethowans LLP) for the Respondents
Hearing date: 16 th February 2018
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Pinetum Ltd (“the Company”) is a phoenix company arising from the ashes of Pinetum Manufacturing Ltd (“PML”). In 2009 the Company acquired out of the administration of PML its furniture production business for a deferred consideration, most of which was never paid.
The directors of the Company were Dean Robbins and Richard Robbins (“the Directors”). They had also been the directors of PML. But, according to the judgment of Chief Registrar Baister, they had little grasp of the duties of directors. The sole shareholder of the Company was Dean Robbins, although at one point this seems to have been a matter of some doubt. Dean Robbins also claimed to be entitled to some royalty payments due under an agreement made with him at the time of the Company's acquisition of PML's business.
The Company was not well capitalised and ultimately came to rely on an invoice factoring arrangement. The invoice factor appointed administrators of the Company in September 2010. The Company then entered into a Creditors' Voluntary Liquidation on 23 rd February 2011. Mr Toone and Mr Murphy were appointed Joint Liquidators.
The Company's dealings are traceable through two routes: —
a) The Sage accounting system which it operated (on which there were maintained separate journals for wages and dividends); and
b) The management accounts prepared by the Company's accountant.
However not all payments out of the Company's bank account found their way in to these accounting records. In all, the Company appears to have paid some £185,216 to the Directors during the months that it traded before entering into insolvency (having left unpaid the bulk of the deferred consideration payable to PML's office holders on the acquisition of the business in PML's insolvency).
Between February 2010 and June 2010, the Company made payments to the Directors of £94,000. On 1 st February 2010 it paid £10,000 to Dean Robbins and £9,000 to Richard Robbins. On 22 nd February 2010 it paid £8,000 to Dean Robbins and £7,000 to Richard Robbins. Thereafter standing orders were set up under which £8,000 per month was paid to Dean Robbins and £7,000 per month to Richard Robbins. These payments continued during the period in which the Company must have been insolvent because of its inability to pay either the deferred consideration or substantial tax arrears.
The Joint Liquidators sought to recover these payments as unlawfully paid dividends (the Company not having prepared any statutory accounts and having no distributable profits). The Directors resisted repayment on the ground that these payments were a disguised remuneration. The basis of the liquidators' case was that each of these payments was recorded in the management accounts as “dividends”: and the Sage accounting records also had entries for them in the “dividends” journal. The basis of the defence of the Directors was that most of the payments were made by standing order, and were similar (in amount and regularity) to the payments they had received by way of remuneration from PML. This issue was considered at a two-day hearing in July 2017 before Chief Registrar Baister, at which each of Dean Robbins and Richard Robbins was cross examined.
In the reserved judgment which the Chief Registrar delivered he found (at paragraph [18]) that the payments made and described as “dividends” were indeed dividends, or purportedly so. In doing so he relied on the following matters: —
a) Their description in the Company's own books and records (and in particular that the 1 st February 2010 payment of £19,000 had originally been entered as “wages”, but the entry had been reversed and a new entry made in the “dividends” journal):
b) The failure to deduct PAYE or NIC from the payments:
c) The fact that they were round sums to which Dean Robbins had referred in oral evidence as “provisional dividends”, which suggested that they were distributions on account of anticipated dividends:
d) The declaration of Dean Robbins in his belatedly disclosed tax return of the receipt of dividends in the sum of £26,666 gross (inclusive of associated tax credit):
e) The original defence of the Directors (maintained both by their accountants and their solicitors) that the payments were lawful dividends.
The Chief Registrar accordingly ordered that the Directors were together jointly and severally liable to pay the sum of £94,000 plus interest of £27,443 to the Joint Liquidators by 31 st October 2017.
During 2009 there had also been irregular payments of varying amounts by the Company to Dean Robbins and to Richard Robbins which were described as “remuneration” or “monthly wages”. Ignoring the PAYE and NIC due on these payments (which went unpaid) the sums received by the Directors had totalled £50,122.
The case of the Joint Liquidators was that these payments were unlawful distributions of capital. The Joint Liquidators said that there were in existence no written contracts of employment, there were no resolutions authorising the payment of remuneration or fees to directors, and that the simple fact of payment by a company with a sole shareholder was not sufficient to validate the payments.
To understand that argument it is necessary to refer to the Company's constitution. The Articles of the Company incorporated Table A. Regulation 82 of Table A provides: —
“The directors shall be entitled to such remuneration as the Company may by ordinary resolution determine and, unless the resolution provides otherwise, the remuneration shall be deemed to accrue from day to day”.
An ordinary resolution must be passed in accordance with the provisions of Section 281 of the Companies Act 2006 (“the Act”). To be validly passed a resolution of the members of a Company must be passed at a General Meeting of which notice (both of the meeting and of the resolution) had been given, which meeting had been held and conducted in accordance with Chapter 3 of Part 13 of the Act. But Article 8 of the Articles of the Company provided:-
“8.1 If the company has only one member and that member takes a decision which is required to be taken in general meeting……. the decision shall be valid as if a general meeting had taken place…….
8.2 A decision taken by a sole member subject to paragraph 8.1 above shall be recorded in writing and entered in to the company's minute book”.
The Company's books contained no record of any general meeting at which a resolution entitling the Directors to remuneration had been passed: and the Minute Book contained no record of any decision on that matter by Dean Robbins as sole shareholder.
The case for the Directors was that they had each worked hard for the Company and there was an understanding between them that they would be paid for that work: but they did not always draw their full remuneration in order to help with the cash flow.
Chief Registrar Baister grappled with what he described as “the confused evidential material” and found the position, on the balance of probabilities, to be as follows: —
a) Dean Robbins and Richard Robbins intended that they should be remunerated by the Company (as they had been by PML). A contract came about between the Company and each of them by performance or by course of conduct (if not by the operation of TUPE).
b) The fact that the payments were irregular and of varying amounts is was no more than a reflection of the vicissitudes of the Company's trading, the Directors foregoing some of what they would otherwise have been entitled to receive.
c) The payments that were actually made must have been authorised, not in the sense of a single decision having been made as to annual remuneration, but rather by Dean Robbins as cheque signatory authorising the payment of individual sums from time to time after discussion with his brother (the Chief Registrar accepting the evidence of Dean Robbins that “we had a chat”).
d) Those events evidenced decisions made by Dean Robbins wearing his director's hat and his shareholder's hat, and as such were covered by Article 8.1.
e) There was no reason why payment of intended remuneration should not have been made irregularly or even why payments should not have been made on account.
f) Payment of remuneration in that way did fall foul of Article 8.2.
g) The principle summarised in Re: Duomatic Ltd [1969] 2 Ch 365 was available to validate the decision notwithstanding that the prescribed procedure had not been followed.
(I will deal with the legal analysis at greater length later in this judgment).
On those grounds the Chief Registrar held that the sums paid in 2009 by way of remuneration could be retained by Directors.
In the concluding paragraph of his judgment the Chief Registrar said (in favour of the Joint Liquidators) that the sums recoverable by them should be identified by reference to bank statements, not from the Company's books and records; and he noted that there may be an issue about whether the sums so proved to have been to have been received might have exceeded £10,000 per month such that they could not have been properly authorised. Those matters he reserved for...
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