England and Wales Court of Appeal (Civil Division) Decisions

		Neutral Citation Number: [2002] EWCA Civ 779
		Case No: A2/2002/0199

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN’S BENCH DIVISION
MR JUSTICE GAGE

		Royal Courts of Justice Strand, London, WC2A 2LL
		31st May 2002

B e f o r e :

LORD JUSTICE SIMON BROWN
LORD JUSTICE MUMMERY
and
MR JUSTICE HART
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Between:


	CURRENCIES DIRECT LIMITED	Appellant
	- and -
	PETER SIMON ELLIS	Respondent

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(Transcript of the Handed Down Judgment of
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____________________

MR SIMON RUSSEN (instructed by Abrahams Dresden) for the Appellant
MR CHRISTOPHER SPRATT (instructed by Bailey Gibson for the Respondent)
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HTML VERSION OF JUDGMENT
AS APPROVED BY THE COURT
____________________

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Lord Justice Mummery :

The Appeal

1. This is an appeal by Currencies Direct Limited (the Company) from an order of Gage J dated 19 October 2001. He ordered that judgment be entered for the Company against Mr Peter Ellis, a former director of, and a shareholder in, the Company, in the sum of £46,679.76 (a debt of £43,117, plus interest.) The issue on this appeal is whether the judge was right to hold that further substantial sums paid by the Company to, or for the benefit of, Mr Ellis between 1997 and April 2000 represented irrecoverable remuneration, not repayable loans.
2. The judge refused permission to appeal. Permission was granted by Rix LJ on 21 November 2001. This was followed by the grant to Mr Ellis on 1 May 2002 of limited permission to cross appeal, seeking to set aside the entire judgment.

Rival Contentions

3. Mr Russen, on behalf of the Company, contends that judgment should have been given for the substantially larger sum of £253,000 (plus interest), being the total of the sums paid to Mr Ellis by the Company from time to time between 1997 and April 2000. The Company’s claim was formulated in the Claim Form issued on 10 November 2000 as “Repayment of a director’s loan account.” It was pleaded that, during the course of his directorship of the Company, Mr Ellis borrowed money from it and then wrongly refused to repay it after a formal demand for repayment on or before 7 October 2000.
4. Mr Spratt, on behalf of Mr Ellis, contends that the sums claimed by the Company were paid to Mr Ellis by the Company as remuneration. So he was entitled to keep them.
5. After a six day hearing on these and other issues, the judge handed down a detailed and careful reserved judgment. He held that Mr Ellis was liable to repay £43,117, which was the subject of an express written acceptance of liability to repay that sum on demand, as evidenced in a letter dated 10 December 1998 signed by Mr Ellis. But the balance of the sum claimed by the Company was remuneration, which Mr Ellis was not liable to repay.
6. The judge rejected Mr Spratt’s contention that the obligation to repay the sum of £43,117 was unenforceable as a loan by the Company to a director in contravention of sections 330, 341 and 342 of the Companies Act 1985. That part of the judgment was the subject of Mr Ellis’s cross appeal, which was not pursued at the hearing. Mr Spratt, who described the cross appeal as “protective”, correctly recognised the difficulties in contending that the basis of the claim for that sum was other than an agreed liability for restitution of overpayments of remuneration (see paragraph 15 below).

Background Facts

7. The Company was incorporated in 1995. It specialises in dealing in foreign exchange on behalf of clients, making its money by commission on foreign exchange deals done on behalf of the Company by self employed agents, who receive a percentage of the commission earned by them individually.
8. Although Mr Ellis was initially the majority shareholder, from April 1997 he was an equal shareholder with Mr Mayank Patel and Mr Neil Redcliffe. From May 1997 until April 2000, when Mr Ellis severed his working relationship with the Company, Mr Patel and Mr Ellis were the controlling directors of the Company. Mr Ellis was employed as the Managing Director of the Company.
9. As pointed out by Hart J in the course of argument, no point was taken in the pleadings, and there was no evidence and argument before the judge, on the power of directors in the position of Mr Ellis and Mr Patel, under the Articles of Association of the Company, to enter into an agreement with the Company for their remuneration. Regulation 94 in Table A provides that

“Save as otherwise provided by the articles, a director shall not vote at a meeting of directors or of a committee of directors on any resolution concerning a matter in which he has, directly or indirectly, an interest or duty which is material…”

10. No case was advanced at trial or on appeal that there was a breach of duty by Mr Ellis as a director of the Company. No reliance was placed by the Company on any of the provisions of the Articles of Association, which might bear on this point. The Articles were not even in evidence.
11. Mr Ellis and Mr Patel worked hard for the Company as full time working directors. They were responsible for earning more commission for the Company than the self-employed agents used by the Company. In the accounts for the ending 30 April 1997 the remuneration of the directors was shown as £2946. Early in 1998 the directors’ salaries were suspended, but were reinstated in March 1998. According to the minutes of the board meeting of 12 March 1998 it was agreed that

“…no extraordinary payments or benefits in kind etc can be made or provided for without approval, consultation and agreement of the existing shareholders currently on the board.”

12. That procedure was adhered to by Mr Ellis and Mr Patel, who resolved, as they thought fit at board meetings, that the Company should pay them remuneration. Throughout the relevant period each director had an American Express card, the monthly account of which was paid by the Company. The sums claimed were received by Mr Ellis either in cash or by payment of personal expenses incurred by him. The majority of the sums varied in amount. They did not conform to any particular pattern. Mr Ellis gave little thought to the level of his drawings, other than to believe that the Company could afford to pay him a proportion of the commissions earned by himself, Mr Patel and other commission agents.
13. Mr Ellis and Mr Patel believed that they could treat the sums received from the Company as self-employed earnings, paying tax on a self-employed basis at some time in the future. (The judge rejected Mr Ellis’s evidence that he regarded the receipts as net of PAYE and NIC.) The Company had not paid PAYE or NIC in respect of the sums paid to Mr Ellis and Mr Patel. The Company’s accountants, Price Bailey, became concerned in 1998 about the treatment of receipts by the directors in the year ending 30 April 1998. Mr Ellis and Mr Patel were advised by the accountants in October 1998 that it was unlikely that they would be able to treat their receipts as self employed earnings. This meant that the Company was liable to pay PAYE and NIC on the sums paid to the directors. Provision for that liability in the accounts for the year ending 30 April 1997 would produce a loss. If the Company had been required by the Inland Revenue to discharge that liability in 1998, doubts would have arisen about its solvency and the ability of Mr Ellis and Mr Patel to continue to earn their living in this way, even though the Company’s financial prospects had vastly improved during 1998.
14. It should be made clear that it is common ground that the circumstances surrounding payments made by the Company to, or for the benefit of, Mr Ellis were similar to those surrounding payments to Mr Patel, who is now the majority shareholder in the Company. If the sum claimed against Mr Ellis is due from him to the Company, then the sum of £221,545.20 paid to, or for the benefit of, Mr Patel is due from him to the Company. Mr Patel has taken no steps to repay any part of that sum. No proceedings have been commenced against him by the Company for their recovery on the basis that they were by way of loan.
15. As for the sums received by Mr Ellis in the period up to 30 April 1998, the judge held that they were received as remuneration, not as loans on account of salaries subsequently to be determined. The judge went on to hold, however, that Mr Ellis was liable to repay £43,117 to the Company as a loan on the basis of a specific agreement made in December 1998 in the context of the accounts for the period to 30 April 1998. Mr Ellis and Mr Patel agreed that each would receive in respect of that period a salary of £4,045, being the level of personal allowances for income tax purposes. They agreed to treat further sums received by them in that year as directors’ loans. According to a document signed by Mr Ellis on 10 December 1998 Mr Ellis acknowledged that the sum outstanding from him was £43,117 repayable to the Company on demand. In a similar document Mr Patel acknowledged that the sum outstanding from him was £35,175. The acknowledgements were found by the judge to be recognition of the fact that they had caused themselves to be overpaid in respect of that period. They would make the payments to the Company out of future earnings in the expectation that sufficient funds were being earned by the Company for the directors to pay the sums out of current remuneration. They jointly directed the accountants that the respective amounts be carried forward in the accounts for the period to 30 April 1998 as loans. The judge rejected Mr Ellis’s contention that the arrangement was not genuine.
16. As already indicated the judge held that the remainder of the sums received by Mr Ellis were remuneration. The argument on the appeal has focused on whether the judge correctly characterised the payments made after 30 April 1998 as remuneration.

The Remuneration Point

17. Mr Russen made it clear that the challenge by the Company on the appeal was not to the judge’s findings of primary fact, but rather to the legal consequences attached by him to those facts. The essence of his argument is that there was no agreement for the payment of remuneration, apart from the agreement made in December 1998. Under that agreement remuneration was agreed in respect of the period to 30 April 1998 at £4045. He contended that, in the absence of any other specific agreement on the quantum or level of salary to be paid by the Company or on a formula for determining the quantum of the salary to be paid, Mr Ellis was not legally entitled to be paid any other remuneration by the Company. He was unable to identify either the date on which an agreement to pay remuneration was concluded or the amount that he was entitled to receive as remuneration. In those circumstances the explanation for the payments made to him, or for his benefit, was that he was not entitled to keep them. The inevitable consequence was that the payments were loans, which he was liable to repay to the Company.
18. Mr Russen also submitted that the belief of Mr Ellis and of Mr Patel that they were receiving payments from the Company as remuneration and that they were entitled to keep them was not a sufficient basis for the judge’s finding that the payments were in fact remuneration. The actuality was that the Company could not afford the level of payments made. As Mr Ellis must have known that the payments were overdrawal of funds, they must have been loans to him. The basis of the agreement for the repayment of the sum of £43,711 and the treatment of that sum as a loan was that the Company had overpaid him. That made it unlikely that there was any agreement that payments should continue to be made by the Company as irrecoverable remuneration at the level at which they were made. Had the judge found, as he ought to have found, that there was no entitlement to remuneration (save as to £4045 per annum) the Company would have been entitled to repayment of the total sum claimed of £253,000.

Conclusion

19. I would dismiss the appeal. The judge was entitled to conclude, on the basis of his findings of primary fact, that the sums claimed by the Company were not repayable to it as loans. It was not established on the evidence that the payments were made by the Company to Mr Ellis as advances, subject to an express or an implied term that they were to be repaid. The judge was entitled to conclude that the explanation for and the cause of the payments was the work which Mr Ellis had undoubtedly done for the Company and the services he had rendered to it.
20. Mr Russen’s submissions are based on a misconception that a payment can only properly be characterised as remuneration if there is a specific agreement fixing the level or rate of remuneration or defining a formula for ascertaining a definite amount to be paid. The essence of remuneration is that it is consideration for work done or to be done. The consideration may take different forms. It is not necessarily in the conventional form of a direct payment of a regular wage, salary cheque or credit. As Blackburn J said in R v. The Postmaster General (1876) 1 QBD 858 at 663-

“If a man gives his services, whatever consideration he gets for giving his services seems to me to be a remuneration for them. Consequently, I think if a person was in receipt of a payment or in the receipt of a percentage, or any kind of payment which would not be an actual money payment, the amount he would receive annually in respect of this would be “remuneration”…”

21. In argument Mr Russen accepted that payments can have the character of remuneration if made, for example, to third parties in discharge of the debts of the person, who has done or is to do work, or if they take the form of commissions, fees or bonuses. The consideration may be a one off lump sum payment or it may be spread over a period. The obligation to pay need not arise from an express contract. Where no express agreement is reached on the level of remuneration the person, who has done or agreed to do work in circumstances in which it can be inferred that there was a common intention that he should be paid, is entitled to recover reasonable remuneration under an implied contract to pay a quantum meruit.
22. The position here is simple. Mr Ellis did work for the Company. He received consideration from the Company. The judge was clearly entitled to infer that the consideration received was in respect of the work done for, or the services rendered by him to, the Company. It was plain from the evidence, in particular the minutes of the meeting of 27 October 1998, that all concerned in the discussions about the receipts of the directors from the Company’s funds (the accountant- Mr Nicholas Mayhew-as well as Mr Ellis and Mr Patel) regarded the payments as remuneration giving rise to potential tax consequences either for the recipients or for the Company, not as repayable loans.

Result

23. I would dismiss the appeal and the cross appeal.

Mr Justice Hart

24. I agree with the judgment of Mummery LJ which I have seen in draft. There was a clear finding by the judge, which was not challenged, that the relevant payments were considered by Mr Ellis and Mr Patel (who were responsible on behalf of the appellant for their payment) to be remuneration. It was at no stage contended by the appellant that it was either outside the powers, or an improper exercise of the powers, of the directors to authorise these payments to themselves as remuneration. In those circumstances, the appellant’s contention that the payments were made as loans (which would have been illegal) is untenable.

Lord Justice Simon Brown

25. I agree that this appeal and the cross appeal should be dismissed.
Order: Appeal will be dismissed with the appellant to pay the respondent the costs of that appeal. The cross-appeal is dismissed, the respondent to pay the appellant the costs of the cross-appeal. There will be, if not agreement, detailed assessment with regard to costs on each. The respondent’s costs of this hearing to be disallowed. (Order does not form part of the approved judgment)