Re Exchange Banking Co, Flitcroft’s Case: CA 1882

For several years, the company had paid dividends drawn against false accounts, and paid them to the directirs as shareholders. When in insolvent liquidation, the copany sued thosee directors for the return of all the dividends wrongly paid out.
Held: Sir George Jessel MR and Brett LJ held unequivocally that the dividends were recoverable in full, and would have been even had the company remained solvent.
Cotton LJ drew a distinction, saying: ‘The corporation is not the mere aggregate of shareholders. If the corporation were suing for the purpose of paying over again to the shareholders what the shareholders had already received the Court would not allow it. But that is not the case here, the company is insolvent, and there is no objection to allowing it to get back its funds for the purpose of paying debts. The case of the liquidator is stronger, for in some respects he, as a quasi trustee for creditors as well as shareholders, stands in a different position from the company. But I rely on this, that the money was not paid to the corporation, but was paid improperly to individuals, and the corporation can sue the directors to get it back that it may be applied in payment of the debts of the corporation.’
Sir George Jessel MR said: ‘A limited company by its memorandum of association declares that its capital is to be applied for the purposes of the business. It cannot reduce its capital except in the manner and with the safeguards provided by statute . . There is a statement that the capital shall be applied for the purposes of the business, and on the faith of that statement, which is sometimes said to be an implied contract with creditors, people dealing with the company give it credit. The creditor has no debtor but that impalpable thing the corporation, which has no property except the assets of the business. The creditor, therefore, I may say, gives credit to that capital, gives credit to the company on the faith of the representation that the capital shall be applied only for the purposes of the business, and he has therefore a right to say that the corporation shall keep its capital and not return it to the shareholders, though it may be a right which he cannot enforce otherwise than by a winding-up order.’

Cotton LJ, Sir George Jessel MR and Brett LJ
(1882) 21 Ch D 519
Cited by:
CitedHolland v Revenue and Customs and Another SC 24-Nov-2010
The Revenue sought an order under section 212 of the 1986 Act, for payment of the tax debts of the insolvent company by a de facto director. H had organised a scheme under which IT contractors had worked through companies created by him under a . .

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Updated: 02 November 2021; Ref: scu.467093