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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Bednash v Hearsey [2001] EWCA Civ 787 (15 May 2001) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/787.html Cite as: [2001] EWCA Civ 787

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
(Mr Nicholas Stewart)

		Royal Courts of Justice Strand London WC2 Tuesday, 15th May 2001

1. SIR MARTIN NOURSE: This is an application for permission to appeal in proceedings brought by a liquidator in respect of excessive remuneration and excessive contributions to a pension fund paid by the company, while it was a going concern, to its major shareholder and principal director, who was also the sole beneficiary of the pension fund.
2. The claim was brought in respect of payments and contributions made between April 1990 and 24th February 1994, the latter date being that on which the company, DGA (UK) Limited, went into creditors' voluntary liquidation. Its major shareholder and principal director was Mr David Hearsey, a consulting engineer, and the company existed for the purpose of employing him in that capacity. Originally joint liquidators were appointed, but on 6th May 1999 Mr. Lane Bednash was appointed to be the sole liquidator in their place. That was followed by the commencement of these proceedings by an originating application issued in the Companies Court on 11th May 1999.
3. In the proceedings Mr. Bednash sought recovery from Mr. Hearsey under several provisions of the Insolvency Act 1986, but his claim came to be based principally on section 212 which, amongst other things, gives the court power in a winding up to order a former officer of the company to make payment to the company in respect of misfeasance or breach of fiduciary or other duty in relation to the company.
4. The trial of the application took place before Mr Nicholas Stewart QC, sitting as a deputy judge of the Chancery Division in November 2000. It lasted for six days. In his reserved judgment, delivered on 15th February 2001, the judge rejected the claim in part. However, he held that payments of remuneration and pension contributions, totalling some £250,000, which Mr. Hearsey had caused the company to make between 5th April 1993 and 24th February 1994, amounted to misfeasance within section 212. The £250,000 was made up of a £50,000 pension contribution paid on 5th April 1993, a £100,000 pension contribution paid on the following day, 6th April 1993, and £50,000 paid as salary in each of the months of September and October 1993. The judge ordered Mr. Hearsey to pay to the company the sum of £158,023 plus the costs of the liquidation, together with most of the costs of the proceedings. He refused Mr. Hearsey permission to appeal to this court.
5. It is important to emphasize that the judge made no finding that the company was insolvent at the time that any of the material payments was made. What he did find was that the remuneration package as a whole was not excessive for someone of Mr Hearsey's qualifications in practice as a consulting engineer. He went on to find, however, that when the payments were made Mr. Hearsey had reason to suppose that there was serious risk or difficulty for the company, that he had no reliable view of the overall financial strength of the company and that he could not be confident of its ability to make the payments.
6. In regard to the payments in question, the judge said that the payment of £50,000 on 5th April 1993 was so irresponsible as to have been a breach of his fiduciary duty to the company, given that he had already had pension payments of £72,376 during that tax year. In paragraph 58 of his judgment he said:

"Even if the £50,000 payment on 5 April 1993 could have been regarded as excusable I cannot see any justification for the £100,000 payment on 6 April 1993. In my view Mr. Hearsey, by approving that payment on the very first day of the fiscal year, was deliberately setting out to ensure that his pension fund was built up while the company could actually lay its hands on the cash, while letting the future and more importantly the creditors look after themselves if it came to the crunch (which he must have known it could easily do - as it did)."

7. Finally, in paragraphs 60 and 61 the judge said:

"Even if I were being too harsh on Mr Hearsey over the pension payment on 5 April 1993, the irresponsibility of the other payments is even clearer.

In the last year of this company's life, Mr Hearsey was trying to make sure that if the company collapsed, as he must have suspected it might well do, he would come out of it with some fat pension contributions and some healthy sums in his bank account even if it meant leaving the company with substantial unpaid creditors behind him."

8. The judge's view of the law was that it was unnecessary for the liquidator to show that the company had been insolvent at the time that the payments were made. Earlier in his judgment he had said in paragraph 50:

"While a company is not actually insolvent and is continuing to trade, directors deciding what to pay themselves must strike a fair balance, taking into account the value of their services to the company, the position on creditors, the company's overall state and the availability of funds to make the payments. Reasonable latitude must be allowed before the court will say that payments to directors are so irresponsible as to have constituted a breach of their fiduciary duties; and it would take exceptional circumstances before they would be expected (if they ever were) to suspend their own remuneration altogether."

9. In my view, in giving himself that direction, the judge correctly stated the appropriate legal test.
10. The judge's view became even clearer in the written reasons he gave for refusing Mr. Hearsey permission to appeal, which I read in full:

"1. Permission to appeal was sought on the single issue that I had wrongly concluded on the authorities that it was not necessary for the applicant to show that the company had been actually insolvent when the payments alleged to have been in breach of duty were made.

2. I am confident that my approach was correct. It is a matter of degree and there must be situations in which it is an irresponsible breach of duty for directors to authorise payments even though the company is technically solvent.

3. This was clearly one of those situations, ie the company was not actually insolvent."

11. Mr. Hearsey applied to this court for permission to appeal. His application was refused by Mance LJ on consideration of the documents. Miss Giret QC renews the application before us. She relies, first, on the fact that the judge made no finding that the company was insolvent at the time that any of the impugned payments were made; secondly, on the fact that he did find that the remuneration package as a whole was not excessive in the circumstances.
12. As for the authorities, Miss Giret has relied principally on the well-known decision of Oliver J in Re Halt Garage Ltd [1982] 3 All ER 1016, from which she correctly extracts the proposition that the amount of remuneration awarded to a director is a matter of company management, and that provided there has been a genuine exercise of the company's power to award remuneration, it is not for the court to determine if, or to what extent, the remuneration awarded was reasonable. However, Oliver J went on to recognize that, if the director's remuneration was excessive or unreasonable, it would not avail him to argue that the matter had been decided by the company as a matter of company management.
13. In the last analysis, it seems clear that the reasonableness or not of the remuneration as a whole is not the decisive factor. The question is whether, in the particular circumstances, the company can afford to pay it, and whether the decision to do so has or has not amounted to gross negligence. That that is the correct test appears from the judgment of Templeman LJ in In re Horsley & Weight Ltd [1982] Ch 442, 455, where, in a passage relied on by Mance LJ, he said:

"There could have been gross negligence, amounting to misfeasance. If the company could not afford to pay out £10,000 and was doubtfully solvent so that the expenditure threatened the continued existence of the company, the directors ought to have known the facts and ought at any rate to have postponed the grant of the pension until the financial position of the company was assured."

14. Miss Giret has relied on a further passage in that judgment, where Templeman LJ warned against the dangers of hindsight in cases such as this. In other words, it is dangerous to start with the liquidation of the company and then to look back and proceed on an assumption that the liquidation has been caused by the excessive payments. However, it is not necessary to show that the liquidation has been caused by the excessive payments. The test is as I have stated it, namely whether the payment complained of was, in the particular circumstances, grossly negligent and made without a due regard for the finances of the company. Here the judge was perfectly entitled, on the facts which he found, to come to the conclusion that that test had been satisfied. Notwithstanding Miss Giret's well sustained argument, an appeal would have no reasonable prospect of success. I would dismiss this application accordingly.
15. LORD JUSTICE POTTER: I agree. The application is dismissed.
Order: Application dismissed.