The Court of Appeal in Madsen-Ries v Petera considered the reasonableness of directors' remuneration in circumstances when a company is in a dire financial position. Mr and Mrs Petera, directors of a failed transport business, were asked by the liquidators to repay the salaries they declared for tax purposes, because they had not complied with the certification requirements under section 161 of the Companies Act 1993 (Act), being to satisfy themselves on reasonable grounds that the payments were fair to the company. In order to retain the salaries received, they were required to show that the amounts received were fair to the company.
The liquidators' argument was that creditors' interests have to be considered when certifying that directors' salaries were fair to the company. This argument was not accepted by the Court of Appeal, which upheld the High Court's decision that the company gained full value from the work carried out by the directors. As a matter of principle, the Court found that "the concept of fairness in the Act is one that calls for a consideration of the potentially competing interests of a company and its directors, a company and its shareholders, and shareholders themselves, but not the interests of creditors".
See Court decision here.