England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BRISTOL DISTRICT REGISTRY

		Bristol Civil Justice Centre 2 Redcliff Street, Bristol, BS1 6GR
		13 September 2017

HHJ Paul Matthews :

Introductory

1. This is an application made by notice dated 20 September 2016 in the context of the liquidation of a company called Powerstation UK Ltd ("the company"). It seeks:

"A declaration that by causing and/or allowing the payment of dividends to be made to himself from the Company totalling £23,511 at a time when the Company was insolvent, such payments

(a) were unlawful; and/or

(b) amounted to a transaction at an undervalue and/or a preference and/or

(c) evidence the Respondent having misapplied or retained Company money, rendering the Respondent in beach of his fiduciary duties owed to the Company and/or rendering him guilty of misfeasance."

2. The application notice also seeks:

"Consequential upon the said declaration, an order for payment to the Applicant by the Respondent of the sum of £23,511 or such other order as the Court thinks fit.

There is also a claim for costs and other relief.

3. The applicant is not the company or its liquidators, who are not parties. Instead the applicant is the purchaser of the claim under a deed of assignment dated 20 August 2016 executed by the liquidators of the company in its favour. I will come back to that.

Procedure

4. The application is supported by a witness statement of Michael Hartley dated 12 September 2016, and a supplemental witness statement of the same Michael Hartley dated 9 November 2016. Mr Hartley is the owner of the applicant company. The respondent has made two witness statements in reply, one dated 9 December 2016 and the other dated 4 May 2017. One of the two joint liquidators, Lawrence King, made two witness statements in support of the application, one dated 18 May 2017, and the other dated 21 July 2017.
5. The application was originally issued in the Manchester District Registry of the High Court, Chancery Division. It was transferred to the Bristol District Registry by an order dated 31 October 2016. An order made in Bristol on 10 April 2017 gave directions for a trial before a full-time district judge. That trial was originally listed for 9 June 2017, but unfortunately the judge was ill, and the matter was listed before me. Because there was not enough time to deal with the matter in my list on that day, I directed that it be relisted before me on 6 July 2017 for one day. Even more unfortunately, a flood in the basement of the Bristol Civil Justice Centre during the previous week closed that building, and the bulk of the trial of this matter actually took place before me at the County Court in Gloucester. The live evidence was heard there, when Messrs Hartley and King and also the respondent were tendered for cross examination. However, the second written statement of Mr King was served, and written submissions were made by both sides, after the hearing. The applicant's first written submissions were made on 21 July. The respondent's submissions in answer to those were made on 28 July. The applicant's final submissions in reply were made on 1 August. In those final submissions, the applicant objects to the admissibility of some of the submissions of the respondent, saying that they are evidence and expert evidence. I will refer to in more detail this later.
6. At the hearing before me on 6 July 2017 Mr Lawrence McDonald of counsel appeared for the applicant, and the respondent, who is an engineer and not a lawyer, appeared in person. Of course the respondent was fully entitled to represent himself in this matter, but this is, unfortunately, an extremely technical area of the law. I keenly regret the absence of adversarial argument on both the facts and on the law, particularly since the evidence was (in overall terms) rather thin, but the law complex. I am not surprised that the respondent was unable to contribute to large parts of the debate. I have therefore been obliged to some extent to interpret what the respondent has put to me in laymen's language as what I hope are appropriate legal submissions.
7. Having considered all the evidence, the oral arguments and the written material, I am now in a position to give my judgment. I am sorry for the delay in doing so, caused in part by the disruption caused by the flood referred to above, and partly by pressure of other work (including that arising from the retirement of the Bristol mercantile judge in May this year without an immediate replacement).

Factual background

8. The company was incorporated on 29 November 2004, to carry on an engineering garage business, more precisely that of a performance vehicle tuning centre, formerly carried on by a partnership. The shareholders and directors of the company were the former partners of the partnership, namely Mr Richard Benton and the respondent. The company appears to have faced some difficulties with its tax liabilities following the recession caused by the financial crisis which began in 2008. Tax liabilities were held over from 2010 and 2011. Ultimately, in October 2015, HMRC required personal guarantees to be given by the directors, and to pay some taxes in advance, which they were unwilling to give and do. Rather than wait for HMRC or any other creditor to present a petition for compulsory winding up, the directors sought professional advice from a firm of insolvency specialists, Critchleys (in which Mr King is a partner), and as a result of that advice passed a resolution for a creditors' voluntary liquidation on the 25 November 2015.
9. Mr King and his partner Anthony Harris were appointed joint liquidators on 27^th of November 2015. The estimated statement of affairs, based on information supplied to Critchleys by the directors, as at 25 November 2015, showed a net deficiency of £173,594.99. I say at once that the respondent does not accept that this was an accurate figure, although he did accept that it was based on information supplied by the company to Critchleys. The last annual accounts which had been approved and filed at Companies House were for the year ending 30 April 2014. They were unaudited, because the company was small enough not to be required to have its accounts audited.
10. The accounts for the year ending 30 April 2015 had been in the course of preparation by the company's accountants at the time of the resolution for liquidation. But they were never finalised. The accounts for the year ending 30 April 2014 showed a negative balance of £7,794 as at that date. On page 4 of those accounts there appears this note:

"Going concern

At the year end the company shows an insolvent balance sheet. The company meets its day-to-day working capital requirements through the support of the directors who have undertaken that this support will not be withdrawn within 12 months from the date of the signature of these financial statements. On this basis the directors consider it appropriate to prepare these accounts as a going concern."

11. Comparison with earlier financial statements of the company shows that this is a position which is in fact much improved compared with earlier years, but not as good as years before the financial crisis began to take effect. The comparable figures for earlier years are as follows:

2008 £8,135

2009 £ -555

2011 £ -34,691

2012 £ -17,977

2013 £ -10,416.

I only add that no figures were available to me for 2010.

12. Not only were the 2015 accounts never finalised, there were no interim or management accounts available. Dividend certificates purport to show that the respondent received some £23,511 in dividend payments in the period from 24 June 2014 to 26 October 2015. These represent payments of £1383 every month in that period. The explanation given by the respondent for these regular payments is as follows.
13. Both Mr Benton and the respondent were, in addition to being shareholders in and directors of the company, full-time employees of the company. Mr Benton managed the shop floor, where other employees worked on the vehicles that were brought in, and the respondent managed the office side of the business. The recession reduced their business, they had to lay off some employees and introduce a short working week for the remaining employees. Mr Benton and the respondent reduced the amount of money that they took out of the business by £500 per month each, thus saving the company £12,000 in a full year. However, they both worked long days, six days a week. The respondent's evidence, which I accept, was that, if the company had not had the services of Mr Benton or the respondent, they would have had to employ someone else to do what they did.
14. The respondent further explained that the company's accountants had advised them to structure their remuneration in a particular way in order to be "tax efficient". This is of course a euphemism for minimising tax liability in what is considered by those taking part to be a lawful way. It is (if it works) tax avoidance (arranging your affairs so as to fall outside the taxing rules) rather than tax evasion (misreporting or failing to report arrangements which in law fall within the taxing rules). The respondent said that each of Mr Benton and the respondent was paid only £456 per month as an employee, the amount needed to ensure that each of their national insurance contributions was paid. (This figure was said by Twinn Accountants Ltd in a letter of 27 July 2017, annexed to the respondent's final written submissions, to be an error, and other figures were given instead. For present purposes, however, the exact figures do not matter.)
15. Each of Mr Benton and the respondent in addition received payments which were intended to represent dividends on their shareholdings equal to £1383 per month. So the total before tax paid to each director (on the respondent's figures) was £2153 pcm, or at an annualised rate of £25,836. However, at the end of each financial year, the books would be forwarded to the accountant, who would check to see that there were sufficient distributable reserves out of which the dividends could be declared. In two earlier years, 2011 to 2012 and 2012 to 2013, the accountant had told the directors that there were not enough such reserves, and the payments had been recharacterized for accounting purposes, resulting in increased payments under PAYE to them as employees. But the accountant had not done that in relation to the year 2013 to 2014.

The applicant's title to sue

16. The title of the applicant to sue needs to be explained. The claimant is a company which provides services to liquidators. For example, it prepared and sent the letter of claim. Occasionally it buys claims from such liquidators. It did so here. The applicant paid £950 (about 4% of the face value) for the claim of the company against the respondent. The liquidators considered the offer to buy the claim and decided to accept it, apparently on the basis that the company did not have the resources to pursue the claim, and some money received would be more useful to the general creditors than a speculative litigation. That is of course the liquidators' prerogative and their choice. But it means that, to the extent of the assignment, the applicant stands in the shoes of the company in making this application.
17. To understand the scope and extent of the assignment, it is necessary to look first at two earlier letters. First, the applicant, then acting as agent on behalf of the liquidators of the company, wrote to the respondent by letter dated 3 August 2016. This was captioned:

"Letter of Claim pursuant to section 847 Companies Act 2006 (recovery of illegal dividends); and/or pursuant to Section 238 Insolvency Act 1986 (transactions at an under value)".

18. The letter referred to the liquidation of the company, the liquidators' enquiries, including the insolvent state of the company and its lack of distributable reserves, and the payments totalling £23,511 to the respondent. It advanced a claim by the company against the respondent under s 847 of the Companies Act 2006 on the basis that the payments were unlawful dividends. It also advanced a claim based on s 238 of the Insolvency Act 1986, on the basis that these payments were without consideration and amounted to transactions at an undervalue. It invited the respondent to pay these claims, including claimed interest, in the total sum of £24,953.
19. The second letter, dated 25^th of August 2016, is also from the applicant, but now writing as a principal, rather than as an agent. It is captioned "Claim against you pursuant to Companies Act 2006 and/or Insolvency Act 1986", and headed "Notification of Assignment of Claim/Debt". In part, this letter reads:

"We refer to the above matter, the details of which were set out in our letter to you of 3 August 2016. We note that no formal response to that letter has been received and, as at the date of this letter, your accountant has failed to contact us.

This letter is to advise you that the liquidators of Powerstation UK Ltd have assigned their interest in this matter to us; Global Corporate Limited. The assignment has taken effect today (25 August 2016)."

(The reference in this letter to the failure of the respondent's accountant to contact the applicant is difficult to follow, since the earlier letter did not mention anyone's accountant, or make any suggestion as to what he or she should do. But nothing turns on it.)

20. It will be noted that the letter does not define the particular claim, notice of the assignment of which is being given. Instead, it refers back to the letter of 3 August 2016. That letter referred to the claim under section 847 of the Companies Act 2006 and the claim under section 238 of the Insolvency Act 1986.
21. The deed of assignment itself, dated the same day, 25 August 2016, was made between the applicant on the one hand (defined as "the Assignee") and the company, acting by its joint liquidators, on the other (defined as ("the Assignor"). So far as material, it reads as follows:

"RECITALS

(A) On 25 November 2015 Powerstation UK Ltd ("the company") entered insolvent liquidation by virtue of a Meeting of Creditors pursuant to s 98 Insolvency Act 1986

(B) Lawrence King and Anthony Harris of Critchleys LLP were appointed as joint liquidators of the company; and as such hold right and proper authority to enter into this Deed

(C) The assignors identified a potential debt owed to the company comprising alleged illegal dividends and/or transactions at an undervalue ("the debt") by Mr Dirk Hale, a shareholder of the company. The details of the claim against Mr Hale are more fully particularised in a letter of claim and letter before action dated 3 August 2016.

(D) The Assignor has agreed with the Assignee to assign its interest in the Debt to the Assignee, in the terms set out in this Deed.

NOW THIS DEED WITNESSETH as follows:

1. In consideration of the sum of nine hundred and fifty pounds (£950.00), the Assignor does assign its interest in the debt to the Assignee PROVIDED ALWAYS that the Assignor hereby assigns all of its rights, obligations or otherwise in respect of the debt, to the Assignee."

22. It is, of course, not possible in English law for a person owing an obligation to another person to assign that obligation without the consent of the creditor of that obligation. Accordingly, to the extent that the deed of assignment purports to assign obligations of the company, it is ineffective. All such obligations remain with the company. And the words "or otherwise" appear to me to be meaningless. But there can be no doubt that the deed is effective on its face to assign the company's rights in respect of what is defined in recital (C) and the letter of claim of 3 August 2016 as "the debt". At the same time it is clear from that definition that this extends only to the claim to recover unlawful dividends under section 847 of the 2006 Act and/or payments made as transactions at an undervalue under section 238 of the 1986 Act. It will be observed that there is no express mention anywhere of the assignment by the liquidators of any claim in respect of director's misfeasance (whether under s 212 of the Companies Act 2006 or otherwise) or any unlawful preference under s 239 of the Insolvency Act 1986.
23. Notwithstanding this, both in its skeleton argument and before me the applicant's claim to recover the sum of £23,511 was put in three different ways. The first was as a claim against the respondent as a member of the company because there were no sufficient distributable reserves during that year. The second was as a claim against the respondent as a director of the company for misfeasance in paying an unlawful dividend. The third was as a claim against the respondent as a party to a transaction at an undervalue and/or a preference. These claims are all based on statute, and I will therefore set out the relevant statutory provisions here.

Relevant statutory provisions

24. The law relating to unlawful dividends is set out in sections 830, 836 and 847 of the Companies Act 2006. These sections provide as follows:

"830 Distributions to be made only out of profits available for the purpose

(1) A company may only make a distribution out of profits available for the purpose.

(2) A company's profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3) Subsection (2) has effect subject to [sections 832 , 833A  and 835] (investment companies [and Solvency 2 insurance companies])."

"836 Justification of distribution by reference to relevant accounts

(1) Whether a distribution may be made by a company without contravening this Part is determined by reference to the following items as stated in the relevant accounts–

(a) profits, losses, assets and liabilities;

(b) provisions of the following kinds–

(i) where the relevant accounts are Companies Act accounts, provisions of a kind specified for the purposes of this subsection by regulations under section 396;

(ii) where the relevant accounts are IAS accounts, provisions of any kind;

(c) share capital and reserves (including undistributable reserves).

(2) The relevant accounts are the company's last annual accounts, except that–

(a) where the distribution would be found to contravene this Part by reference to the company's last annual accounts, it may be justified by reference to interim accounts, and

(b) where the distribution is proposed to be declared during the company's first accounting reference period, or before any accounts have been circulated in respect of that period, it may be justified by reference to initial accounts.

(3) The requirements of–

section 837 (as regards the company's last annual accounts),
section 838 (as regards interim accounts), and
section 839 (as regards initial accounts),

must be complied with, as and where applicable.

(4) If any applicable requirement of those sections is not complied with, the accounts may not be relied on for the purposes of this Part and the distribution is accordingly treated as contravening this Part."

"847 Consequences of unlawful distribution

(1) This section applies where a distribution, or part of one, made by a company to one of its members is made in contravention of this Part.

(2) If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable–

(a) to repay it (or that part of it, as the case may be) to the company, or

(b) in the case of a distribution made otherwise than in cash, to pay the company a sum equal to the value of the distribution (or part) at that time.

(3) This is without prejudice to any obligation imposed apart from this section on a member of a company to repay a distribution unlawfully made to him.

(4) This section does not apply in relation to–

(a) financial assistance given by a company in contravention of section 678 or 679, or

(b) any payment made by a company in respect of the redemption or purchase by the company of shares in itself."

In addition, the decision of the Court of Appeal in It's a Wrap Limited v Gula [2006] BCC 626 puts an important gloss on section 847(2). I return to this case later.

25. The law relating to misfeasance is set out in section 212 of the Insolvency Act 1986. This section provides as follows:

"212.— Summary remedy against delinquent directors, liquidators, etc.

(1) This section applies if in the course of the winding up of a company it appears that a person who—

(a) is or has been an officer of the company,

(b) has acted as liquidator [...] or administrative receiver of the company, or

(c) not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company,

has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

(2) The reference in subsection (1) to any misfeasance or breach of any fiduciary or other duty in relation to the company includes, in the case of a person who has acted as liquidator [...] [...] of the company, any misfeasance or breach of any fiduciary or other duty in connection with the carrying out of his functions as liquidator [...] of the company.

(3) The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him—

(a) to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or

(b) to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.

(4) The power to make an application under subsection (3) in relation to a person who has acted as liquidator [...] of the company is not exercisable, except with the leave of the court, after [he] has had his release.

(5) The power of a contributory to make an application under subsection (3) is not exercisable except with the leave of the court, but is exercisable notwithstanding that he will not benefit from any order the court may make on the application."

26. The law relating to transactions at an undervalue and preferences is set out in sections 238 and 239 of the Insolvency Act 1986. These sections provide as follows:

"238.— Transactions at an undervalue (England and Wales).

(1) This section applies in the case of a company where—

[(a) the company enters administration, or]

(b) the company goes into liquidation;

and "the office-holder" means the administrator or the liquidator, as the case may be.

(2) Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.

(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.

(4) For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—

(a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or

(b) the company enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company.

(5) The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied—

(a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and

(b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.

239.— Preferences (England and Wales).

(1) This section applies as does section 238.

(2) Where the company has at a relevant time (defined in the next section) given a preference to any person, the office-holder may apply to the court for an order under this section.

(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not given that preference.

(4) For the purposes of this section and section 241, a company gives a preference to a person if—

(a) that person is one of the company's creditors or a surety or guarantor for any of the company's debts or other liabilities, and

(b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.

(5) The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b).

(6) A company which has given a preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5).

(7) The fact that something has been done in pursuance of the order of a court does not, without more, prevent the doing or suffering of that thing from constituting the giving of a preference."

The applicant's claim (1): unlawful dividends

27. In relation to the first basis of claim, the applicant's argument is simple. Section 830 provides that a company may only make a distribution out of certain kinds of profits. Then section 836 provides that the question whether a company may make a distribution has to be referred to the company's last annual accounts, or, if the distribution would then contravene the rules, to interim accounts. In the present case, there are no interim accounts and the last annual accounts are those to 30 April 2014. But they show that the company at that date was insolvent, because its liabilities exceeded its assets. It could continue to operate only because of the support of its directors.
28. The respondent made much of the fact that – at least as he saw it – the company was trading profitably in that year. But whether the company was able to pay its debts as they fell due and was making a profit in the accounting period, are both irrelevant to the question whether there were in fact distributable profits out of which to pay dividends. On the face of the 2014 accounts, there were not. In essence, where there have been historic losses, those losses must be made good before there can be distributable profits out of which to declare dividends. That had not happened by 30 April 2014.
29. Accordingly the payment of the dividends (if that is what they were) was unlawful, and the consequences are set out in section 847. If it can be shown that at the time of the distribution concerned respondent knew or had reasonable grounds for believing that the distribution was made in contravention of that part of the Companies Act 2006, he is liable to repay it to the company.
30. The decision of the Court of Appeal in It's a Wrap Limited v Gula is to the effect that all that is necessary in order for a member of a company to be liable is knowledge of the relevant facts which led to the legal conclusion that the distribution contravened the statute. It is not necessary for the member to know that the Act is being contravened. There can be no doubt in the present case that the respondent was aware that the company had historic losses which had not been made good by the time of the dividends being declared between June 2014 and October 2015.
31. I accept the respondent's evidence that he believed that by then the company was trading profitably and, left to continue to trade, would wipe out those losses in the future. That, however, is not enough to save the respondent from liability under section 847. The test for the ability lawfully to make distributions to members is not whether a company is then trading profitably. It is whether it has sufficient distributable reserves (as defined by the Act) at that time. It is accordingly unnecessary for me to take into account the new evidence which the respondent seeks to adduce in his closing submissions of 28 July 2017 to demonstrate profitable trading. (Indeed, to the extent that it is expert evidence, I could not do so without giving permission under CPR Part 35, which has not been sought.) Nor is there any relevance in the letters from HMRC dated 21 and 22 November 2016 annexed to those submissions. This case is not about whether there are any tax issues arising from the company's affairs. It is about whether s 847 of the Companies Act 2006 has been engaged.
32. There is however a question-mark over the status of the decisions made by the respondent, as a director of the company, in that period to pay out monies to the members as dividends on the company's shares. Should those decisions be regarded (i) as having been made definitively at the time of the distributions, or (ii) as having been made provisionally, subject to a power in the company on the advice of its accountant in effect to undeclare the dividends and re-characterise the payments in some other way if there turned out not to be enough distributable profits for dividends to be declared, or (iii) as having been decided only in principle, with the formal decision left to be made at the year end, when the accountant could see the figures for the full year and determine whether or not there were distributable profits for this purpose? This difficulty arises because the respondent implemented the advice of the accountant that he could on the one hand sign dividend tax forms as each payment was made, and yet on the other in effect finalise the decision as to whether there were in fact dividends being declared only later on when the reserve position was known. It is obvious that the respondent, not being a lawyer or an accountant, never saw the apparent contradiction in this position.
33. The respondent's evidence was that, though the money was paid every month, it was the accountant's decision at the end of the financial year, based on whether there were sufficient distributable profits, as to whether the payments could be dividends or not. As he put it, the company paid the accountant to deal with these things. He said he had known that this was the mechanism since 2012, when the accountant first decided that dividends could not be paid. He also thought that the accountant had not reversed dividend payments in 2013-14 because the company had made a profit in that year. The respondent accepted that he would have known at the time that the balance sheet for 2013-14 showed a negative balance. Indeed he signed the balance sheet on 29 January 2015. I found the respondent to be a naïve witness, but nevertheless I accept his evidence as truthful.
34. As against that, there was the evidence of Mr King, not challenged by the respondent, that dividend tax vouchers were signed by the respondent asserting that each such payment was an interim dividend. Accordingly, it was submitted for the applicant that these were not decisions to be made or characterised later. They were definitive when the forms were signed and the monies paid. In any event, the further evidence of Mr King was that in his experience as a liquidator, most accountants would not have re-characterised payments originally made provisionally as dividends as remuneration of employees, but rather would have placed the sums on a directors' loan account. This would avoid the problems of having to explain why PAYE and NI treatment had not taken place at an earlier stage.
35. I begin by deciding the question of fact raised in paragraph [29] above. Did the company declare dividends at the time of the payments made to the members between June 2014 and October 2015, either definitively or subject to a power to undeclare them if it turned out that there were insufficient distributable reserves? Or did it make no legally valid decision at all at that stage, but simply paid the money?
36. As already stated, I had witness statements from Messrs Hartley and King, as well as from the respondent, and they were all tendered for cross-examination. I record that I found all of them to be trying to assist the court by telling the truth. Of course, Messrs Hartley and King could say very little about the company's decisions to pay monies as dividends, although Mr King has something to say about his own experience as an insolvency practitioner. The respondent was the most important of the witnesses on this subject. After all, his mind is the relevant one for this purpose. It is perhaps a pity that the accountant did not give evidence, but he did not, and I have to do the best I can with the material which the parties have chosen to put before me. The respondent was cross-examined by Mr McDonald for the applicant, but his evidence on the relevant points was not shaken.
37. The evidence is nevertheless limited. I have set it out in summary form above. I add to that two other facts which I find to be established on the evidence. The first is the fact that, as is obvious, and as the respondent knew, the company's accountant would not be in a position to determine whether there were sufficient reserves until well after the dates on which payments were actually made and tax dividend forms signed. Second is the fact that the respondent is not an accountant or other expert in tax or company law; in these respects he relied on his professional advisers. He was advised, and believed, that it was lawful to reduce taxation by adopting the dividend route, knowing that the accountant would need to check the distributable reserve position before preparing the annual accounts.
38. If it stood alone, the fact that, acting on this advice, the respondent signed tax dividend forms for the payments would be sufficient evidence that the decisions were being made to declare dividends definitively at the various times of payment. But it does not stand alone. It is completely at odds with what the respondent knew, ie that dividends could only lawfully be declared if there were sufficient reserves, and also that it could not be known then whether there were, and thirdly that (as in earlier years) the accountant would decide only once the accounts for the year showed the distributable reserve position. On the other hand, his action in signing the forms is consistent with his doing what the company's accountant advised him to do in order to achieve the apparently lawful tax saving. Accordingly, having seen and heard the respondent give evidence, I do not consider that he thought he was making definitive decisions about declaring dividends. Instead, in my view he thought that he was not making any decision at all at that stage, because it all depended on whether there were distributable reserves, and at that stage this was not, and could not be, known.
39. I have not overlooked what Mr King said about what an accountant might or would do after reversing a decision to declare dividends. Yet I do not think that I can or should take that into account, since it seems to me to be expert opinion evidence, for the admission of which no permission had been sought under CPR Part 35. But in any event I do not think that it changes matters. First, Mr King was not the accountant in this case. That accountant might well not have followed Mr King's approach. Without hearing from him, I cannot know. Second, the real point is not what the accountant would have done to resolve the situation. Instead it is what the respondent thought he was doing in causing the company to pay monies to himself and his co-director.
40. Of the three possibilities referred to above, I therefore find the third. I am not concerned here with whether that result causes any difficulties for the respondent as against HMRC, in having signed tax dividend forms when there was in fact no dividend actually being declared. Many people sign forms for production to the authorities later if need be, and then dispose of them if not needed. That is often an unwise, and may in some cases be an unlawful, course of action. And that unwisdom itself feeds into the equation in considering whether a thing happened or not. But, if I am nevertheless satisfied that those are the facts, it cannot and does not alter them.
41. However, if I were wrong about my factual conclusion, then I would hold that the respondent thought he was making decisions which were provisional, in the sense that if they were not reversed they would stand, but that the company retained the power (on the advice of the accountant) in effect to undeclare the dividends in the future if there were insufficient reserves. In my judgment the first possibility (definitive declaration of dividends at the time of signing the forms) is excluded on any view.
42. The only problem with the alternative scenario (provisional decision) is that, on the material before me, at least, this is not a power which the company could have had. I was not told that the company adopted articles of association different from the model articles for private companies contained in the Companies (Model Articles) Regulations 2008. I should therefore assume that it did not. So, by s 20 of the Companies Act 2006 those model articles are by default the articles of the company. As I understand the law, the company could either decide to declare dividends or not so decide. The company had no power under its articles, as I understand it, to decide to declare a dividend subject to a power to change its mind later and reverse the decision. Of course, the company could make a decision (like any transaction) which was later found to be vitiated by some appropriate factor, such as fraud, duress, mistake and so on, but there is nothing of that kind here. There may have been a misprediction by the respondent, at least in believing that the company would be shown to have sufficient reserves when the accounts were drawn up, but misprediction is not mistake: cf Pitt v Holt [2013] 2 AC 108, [104].
43. The result of the alternative scenario would therefore be that there never was a valid decision (or decisions) to declare dividends. What the respondent (on this alternative view) intended was not legally possible. At best no decision was made at the time, the decision being left for once the accounts were prepared and the reserve position could be known. In substance this is the same as the factual position that I have preferred to reach on the evidence.
44. I must therefore apply the relevant law to that factual position. If no dividend was declared, but the payments were made, then, whatever the nature of the payments made to the respondent, they were not dividends, and sections 830 and 847 of the Companies Act 2006 cannot apply to them. In those circumstances, the respondent cannot be liable to repay them as unlawful dividends. I therefore turn to consider the next head of claim against the respondent.

The applicant's claim (2): misfeasance by a director

45. The second way in which the applicant puts its claim in its skeleton argument is as a "misfeasance claim for breach of his fiduciary duties to the company… in his capacity as a director of the company". Essentially, the claim is that there was no proper basis upon which the company could make the payments which it did to the respondent, and the respondent's decision to cause those payments to be made was a breach of his duty to the company. As I have already observed, there may be some difficulty here with the applicant's title to sue, since the deed of assignment did not on its face extend to any claim in respect of director's misfeasance. But there is a more substantive problem as well.
46. At the hearing, I raised with the parties the question whether, if the respondent was under an obligation at first sight to repay the sums taken from the company, there might not be a set off against that obligation arising out of a claim to what used to be called quantum merit, a part of quasi-contract, and later restitution, but is now to be known as unjust enrichment, because of the otherwise unjust enrichment of the company at the expense of the respondent, in the form of the services provided to it by the respondent. As I have already said, he worked full time, six days a week for the company. With Mr Benton, he ran the company. He himself managed the office side of the business. If he had not provided those services, someone else would have had to be engaged to do so, and would have had to be remunerated for doing so. This would not have been a matter of choice. Otherwise the company could simply not have carried on its business. I added that the claim could be illustrated by cases such as Craven-Ellis v Canons Limited [1936] 2 KB 403, CA.
47. Mr McDonald for the applicant submitted at the hearing that, even if such a cross-claim arose, then it would amount to a clear preference because the respondent was a connected party. He amplified this in his written submissions after the hearing. I will refer to these submissions in more detail shortly, when I come to consider the question of a preference. But, for present purposes, the important point is that, if in fact there was a claim which the respondent could make in respect of the value of the services which he provided to the company from time to time, then that would be a legal justification for the payments that were made to him, in exactly the same way as if he was entitled to such payments under a contract of employment. On the face of it, that would mean that there was no claim against the respondent for misfeasance in paying out the company's money without justification.
48. In Craven-Ellis v Canons Limited [1936] 2 KB 403, CA, the articles of the defendant company required that a director should obtain qualification shares in the company within two months of appointment. However, the directors (including the plaintiff) appointed by the signatories of the memorandum of association never did so. After the two months had expired, the plaintiff was appointed managing director of the defendant company by an agreement under the seal of the company agreed to by all the purported directors. The plaintiff performed all the services required under the agreement. Later a dispute between the parties arose, the plaintiff not having been paid, and he claimed for the value of his services, either under the agreement or on a quantum meruit. The Court of Appeal held that the agreement was a nullity, because none of the directors had held shares at the time of its being entered into. Hence no remuneration could be claimed under it. On the other hand, the plaintiff could recover the value of his services on the basis of a quantum meruit.
49. Greer LJ said (at 409):

"The company, having had the full benefit of these services, decline to pay either under the agreement or on the basis of a quantum meruit. Their defence to the action is a purely technical defence, and if it succeeds the Messrs. du Cros as the principal shareholders in the company, and the company, would be in the position of having received and accepted valuable services and refusing, for purely technical reasons, to pay for them.

[ … ]

As regards the plaintiff's services after the date of the contract, I think the plaintiff is also entitled to succeed. The contract, having been made by directors who had no authority to make it with one of themselves who had notice of their want of authority, was not binding on either party. It was, in fact, a nullity, and presents no obstacle to the implied promise to pay on a quantum meruit basis which arises from the performance of the services and the implied acceptance of the same by the company."

50. The defendant company relied on a dictum of Kennedy J in a decision of the Divisional Court called Re Allison, Johnson & Foster Ltd, ex parte Birkenshaw [1904] 2 KB 327. As to this Greer LJ said (at 410):

"This passage appears to involve the proposition that in all cases where parties suppose there is an agreement in existence and one of them has performed services, or delivered goods in pursuance of the supposititious agreement there cannot be any inference of any promise by the person accepting the services or the goods to pay on the basis of a quantum meruit. This would certainly be strictly logical if the inference of a promise to pay on a quantum meruit basis were an inference of fact based on the acceptance of the services or of the goods delivered under what was supposed to be an existing contract; but in my judgment the inference is not one of fact, but is an inference which a rule of law imposes on the parties where work has been done or goods have been delivered under what purports to be a binding contract, but is not so in fact."

51. After examining other cases, Greer LJ concluded (at 412):

"Although I do not hold that the decision of the Court in Ex parte Birkenshaw was wrong, I think that the passage I read from the judgment is not a correct statement of the law."

52. The other judge in the court on that occasion, Greene LJ, also examined the authorities, and concluded (at 415) that, in context, the dictum relied on did not go as far as the company submitted it did, but that if it did then it was wrong for the reasons given by Greer LJ. Accordingly, the fact that the parties all thought, mistakenly, that the plaintiff's services were being supplied under a contract which unknown to them was void, rather than pursuant to a freestanding request by the defendant for services for which they would pay a reasonable price, did not exclude the legal obligation imposed on them to pay for the benefits which they received.
53. The applicant says in its post-hearing written submissions that it would be wrong for any claim in quantum merit to be allowed, because in this case the parties had agreed on the basis of payments to be made to the respondent. It says part was salary, and part was intended to be dividends. It further submits that the fact that the dividend part is unlawful is no reason to allow a claim in quantum merit. It is not however suggested by the applicant that if the respondent's claim in unjust enrichment is made out there would be any relevant defence available to it.
54. I do not accept either submission of the applicant. As I have already said, in Craven-Ellis v Canons Limited the directors had equally agreed in fact how the managing director was to be remunerated, but because the directors had no authority to bind the company the contract was simply void. The Court of Appeal emphasised that the claim in quantum merit did not arise because of an inference of fact, but because of a rule of law. The same point has been made more comprehensively in recent years by the House of Lords: Westdeutsche Landesbank v London Borough of Islington [1996] AC 669, 710E-G, per Lord Browne-Wilkinson; and see also Cleveland Bridge UK Ltd v Multiplex Constructions (UK) Ltd [2010] EWCA Civ 139, [119]-[121].
55. The fact that the dividend cannot be paid lawfully as a dividend is the very reason why the quantum meruit rule is needed, to prevent the unjust enrichment of the company, and in this case its assignee, who bought the claim to recover £23,511 for £950, at the expense of the respondent, who provided the services in question. The relevant rule of law is that, where services necessarily required are supplied on the basis that they would be paid for, and there is no other claim, the law imposes an obligation to pay a reasonable sum for them.
56. In my judgment, that is also the present case. In particular, the respondent's evidence (which I accept) made clear that the idea of paying himself in dividends was a scheme advised by the accountant as a way of saving tax on salary for the work that he did. If there had been no tax advantage there would have been no need to sign the dividend tax forms and the payments (of salary) would have been made in the usual way. Accordingly, in causing the company to make the payments, the respondent was causing the company to satisfy its liability to pay for the services which he had provided. In my judgment, whatever else it may be, this is not misfeasance justifying a claim under section 212.

The applicant's claim (3): payments at an undervalue/unlawful preference

Payments at an undervalue

57. Similarly, once that conclusion is reached, in my judgment these were not payments at an undervalue either. These were payments that were made in respect of the services provided by the respondent to the company. I have already accepted the evidence of the respondent as to the significant work which he did for the company during the period in question, and pointed out that this scheme was entered into only because it was thought to confer tax advantages over paying salary in the normal way. On the material I have seen, there is no question of regarding the value of the payments made as in any way overvaluing the services provided. The value of those payments is too modest for that.
58. An alternative way for the applicant to put the argument would be to say that these were not payments in return for services, even though there may have been an obligation to pay for those services. So what the respondent is seeking to do, in effect, is to set off the payments which were made to him as purported dividends against the liability of the company to pay for his services. And this, the applicant says, the respondent cannot do. He relies on the decision of Millett LJ in Manson v Smith [1997] 2 BCLC 161, a decision on permission to appeal.
59. Strictly speaking, a decision on a question of permission to appeal is not capable of being cited as authority, however distinguished the judge in question: see Practice Direction (Citation of Authorities) [2001] 1 WLR 1001, [6.1], [6.2]. But I think it is right nonetheless that I should look at this decision, not only because the judge was a master of this subject, but also because it provides a useful summary of the earlier case law upon which the judge based himself in reaching the conclusion to refuse permission (and which authorities are properly citable).
60. The applicant was the director of a company who had received payments from the company, which he was ordered to repay under section 212 of the Insolvency Act 1986. He argued that the company owed him money on a director's loan account and that he should be able to set the one off against the other. The judge rejected that submission. Millett LJ refused permission to appeal, because it was a settled point of law

"that there is no set off available between a debt due to a misfeasant and his liability to repay the monies which he has been ordered to pay in misfeasance proceedings" (at 164).

61. As authority for this proposition, he referred to Re Anglo-French Cooperative Society, ex parte Pelly (1882) 21 Ch D 492, a decision of Hall V-C, later affirmed by the Court of Appeal, though on different grounds, and to an earlier decision of the same judge in Pearse's case (1880) 21 Ch D 498n. In Ex p Pelly, Hall V-C relied on Pearse's case in refusing set-off to a director ordered to pay compensation to the company for misfeasance, but who said that the company owed him money. Millett LJ pointed out that in those days, as now, in order for there to be a set-off in liquidation, there must have been mutual dealings leading to cross-claims existing at the time of the liquidation (at that time Insolvency Rules 1986, r 4.90; now Insolvency (England and Wales) Rules 2016, r 14.25).
62. However, that was not the case there. He cited an extract from Hall V-C's judgment in Pearse's case (21 Ch D 498n):

"In this case I have already held Mr. Pearse liable under the 165th section of the Companies Act, 1862, to pay to the liquidator a portion of certain promotion moneys, which portion I considered he had improperly received. He has claimed to set off against this amount a sum which he says the company owed to him at the date of the winding-up, and I reserved for consideration the question whether the set-off can be sustained; and having considered it I have come to the conclusion that it cannot.

A liability under the 165th section is a liability of a delinquent, and until the order directing payment in respect of it has been made should not be treated (in the delinquent's favour) as a debt from him to the company so as to entitle him to a set-off.

At the time of the winding-up it could not be said by Mr. Pearse that there were mutual debts. An order under the 165th section is an order at the instance of the liquidator, creditor, or contributory not upon a claim by the company."

63. Millett LJ said that at the time of the commencement of winding-up there may have been a claim by the director against the company, but the misfeasance order had not then been made, and so there could be no set-off within the rules. The director's remedy was to prove in the liquidation. He also said that the director's actions in simply taking money from the company did not amount to a 'dealing' with it. So there were no mutual 'dealings' either.
64. That is not this case. Here the respondent provided his services to the company with the company's knowledge and agreement. On any view that is a dealing with it. In the circumstances, as I have already said, the company came under an obligation to pay the respondent for the value of those services. At the time of the commencement of the winding-up, the company had in fact paid monies to the respondent, but it owed him money too. That satisfies the requirement for set-off in the liquidation context, if and to the extent necessary. Accordingly, there is nothing in the alternative argument that I have posited.

Unlawful preference

65. The other limb of this part of the claim is that the payments amount to an unlawful preference. This, as it seems to me, is the real substance of the applicant's complaint. It is that the respondent should not be able to prefer himself as a creditor of the company. Instead he should prove in the liquidation for whatever he may be entitled to for his services by way of quantum merit, whereas the company (and now its assignee, the applicant) is entitled to the immediate repayment of the monies paid away to the respondent without lawful justification.
66. The problems with this argument in the present case are twofold. First, the applicant is not an assignee of any claim of the company or the liquidators in respect of a preference. I have already referred to the terms of the assignment and the two letters which preceded it. Neither the letter of the 3 August nor that of the 25 August 2016, nor the deed of assignment itself, refers to any claim to set aside a preference or even to s 239 of the Insolvency Act 1986. The first reference to a claim to set aside a preference that I have been able to find in the documents comes in the application notice of 12 September 2016 (the relevant terms of which I have already set out). But this cannot operate so as to confer on the applicant a title to sue that he otherwise would not have.
67. I have considered whether an assignment of a claim to set aside a preference can be implied into the deed of 25 August 2016. In my judgment it cannot. A preference is not the same as a transaction at an undervalue, and neither is there necessarily an example of the former every time there is the latter. If the applicant wished to take an assignment of the claim to set aside a preference, it should have drafted the deed of 25 August 2016 so as to achieve this end.
68. The second problem is that the liquidators, who retain the right to claim to set aside a preference, are not parties to the present application. In their absence, I am not prepared to decide whether there is or is not a preference in this case, because, if I concluded that there were, I could not make any effective order.

Conclusion

69. In these circumstances, I dismiss the application.