Re Halt Garage (1964) Ltd
Directors' remuneration that is not genuine remuneration for services, but a disguised gift out of capital, is an unlawful return of capital.
Facts
Halt Garage was a small family company run by Mr and Mrs Charlesworth, who were its only directors and shareholders. Mrs Charlesworth became seriously ill and could no longer work, but the company continued to pay her remuneration as a director. The company was making losses, and later went into liquidation. The liquidator sued to recover the payments to Mr and Mrs Charlesworth, arguing that they were excessive and unlawful.
Legal principle
Oliver J held that the payments to Mrs Charlesworth after she stopped working were partly not genuine remuneration, but disguised gifts out of capital, so they were unlawful and had to be repaid. Payments to directors that are authorised by the articles and approved by the shareholders are generally valid, and the court will not usually inquire into whether they are reasonable. But where the payment is not genuinely remuneration for services, it may be a gratuitous distribution of the company's capital, which is unlawful. The payments to Mr Charlesworth, who continued to work, were genuine remuneration.
Related cases on share capital and distributions
- Aveling Barford Ltd v Perion Ltd [1989] BCLC 626
- Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712, [2002] BCC 91
- Belmont Finance Corp Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393
- Brady v Brady [1989] AC 755
- Re Exchange Banking Co (Flitcroft's Case) (1882) 21 Ch D 519
- It's a Wrap (UK) Ltd v Gula [2006] EWCA Civ 544, [2006] BCC 626
- MacPherson v European Strategic Bureau Ltd [2000] 2 BCLC 683
- Ooregum Gold Mining Co of India Ltd v Roper [1892] AC 125
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