Recent case highlights the importance of correctly declaring dividends
A recent case, Re BM Electrical Solutions Ltd, has found a director-shareholder liable to repay sums which were held to be director loans despite having been recorded as dividends in the company’s accounting software package.
For tax saving reasons, the director-shareholder had agreed to a very low salary (net £11,702) on the basis that he could claim other monies as dividends.
After falling into financial difficulty, the company was wound up on 3 August 2015. Upon his appointment, the liquidator identified that transfers of approximately £220,000 had been made to the director-shareholder over a three and a half year period. The liquidator accepted that credit should be given to the director for his salary but claimed that the balance should be treated as loans from the company to the director, which should be repaid.
At trial, the director stated that a small proportion of the sums paid to him were his salary, whilst the rest of the payments were entered onto the accounting software package under a code for ‘dividends’. This was claimed to be a tax efficiency measure.
However, after the first year of trading, the director did not cause any further accounts to be prepared, meaning that the company only ever filed one set of accounts (for the period to 31 January 2012, filed on 11 August 2012).
Judge Lance Ashworth QC held that the sums paid to the director-shareholder were to be treated as director loans made with the expectation that there would be sufficient profits each year to pay them off. The reasons for this were two-fold.
For a dividend to become payable, it must be declared. As the director could not show that he had made such a declaration, he could not argue that the payments received should be treated as dividends.
Notwithstanding the above, a declaration (and subsequent payment) of dividends must be conducted in accordance with Part 23 of the Companies Act 2006. Under Part 23, a company may only pay dividends out of profits available for the purpose and those profits are to be determined by reference to profits, losses, assets and liabilities ‘as stated in the relevant accounts’ (s830 and s836). Those relevant accounts are the last annual accounts or interim accounts if the distribution would otherwise contravene Part 23. Given that no accounts had been drawn up since 2012, even if the payments were considered to be distributions, they would still be considered unlawful as the formalities in Part 23 CA 2006 had not been compiled with.
Accordingly, the director was required to repay the sums to the company (s847 CA 2006).
This case highlights the importance of correctly declaring shareholder dividends. Directors should ensure that dividends are formally and correctly declared in accordance with Part 23, otherwise there will be no liability on the company to pay it.
The judgement also provides a reminder of the risk to director-shareholders who agree to accept a nominal salary on the basis of being able to draw further funds as dividends.
The clarity given by this judgment will be welcomed by officeholders seeking to recover purported dividend payments made to director-shareholders in excess of their salary.
Administrators beware where more than 20 redundancies are planned
The case of Palmer has confirmed that an insolvency practitioner in the role of an administrator can be prosecuted.
Melania Constable and Georgina O'Sullivan write for P3 Pharmacy on the easing of Covid winding up restrictions
Regulations mean that a creditor can once again rely on an unpaid statutory demand to apply to the court for a winding-up petition.
Dimitri A. Sonier
Dimitri Sonier and Denis Meyer write for Les Echos Solutions on the restructuring and reform of French insolvency law
Dimitri and Denis consider developments to French insolvency law following changes earlier in 2021.
Capital Finance and La Lettre des Juristes d'Affaires report on the recruitment of Denis Meyer as Counsel in the firm's Paris office
Denis joins the firm's Corporate Restructuring and Insolvency team in the Paris office.
Charles Russell Speechlys named in Global Restructuring Review’s GRR 100 2021
Restructuring and Insolvency team ranked in Global Restructuring Review
Privy Council confirms ability of courts to grant freezing injunctions in aid of foreign proceedings – but beware the minority report
Georgina looks at the landmark Privy Council judgment on freezing and interim injunctions
PSV 1982 Limited v Langdon: A Warning for Directors in Breach of Section 216 Insolvency Act 1986
Georgina takes a look at PSV 1982 Limited v Langdon
Global Restructuring Review and Law 360 report on the firm's success on behalf of the joint liquidators of LB GP No 1 Limited
After three years of litigation, the Court of Appeal has unanimously accepted GP1’s grounds of appeal.
Insolvencies and rising prices: the energy retail market in flux
Hanh and Sara take a look at the energy market
Charles Russell Speechlys successfully advises the Joint Liquidators of LB GP No.1 Ltd in Lehman Brothers litigation before the Court of Appeal
LBGP is a company within the Lehman Brothers Group, whose purpose was to raise regulatory capital for parts of the Group.
Court of Appeal reviews key principles to consider when making a non-party costs order
Jamie Tilling writes for ThoughtLeaders4 FIRE Magazine on the ramifications of Al Jaber v Mitchell for insolvency practitioners and their investigations
The Court of Appeal has held that the doctrine of immunity from suit applies to statements made by an examinee.
Global Restructuring Review feature the firm’s involvement advising the joint liquidators of LB GP No 1 Limited in the Lehman Brothers’ sub-debt appeal
The Lehman Brothers’ sub-debt appeal continues with guarantor question.
The importance of anticipating the restructuring of State Guaranteed Loans
Denis looks at the importance of anticipating the restructuring of State Guaranteed Loans
Phase out of temporary restrictions on use of winding up petitions
Hannah takes a look at the recent UK Government announcement on statutory demands and the presentation of winding up petitions
Be careful what you reference: when witness evidence waives privilege
Gabrielle looks at the recent decision in Scipharm Sarl v Moorfields Eye Hospital NHS Foundation Trust and its impact on privilege
Weighing in on the importance of attention to detail in service cases
Rory looks at recent judgments that have emphasised the need to follow correct procedure when serving documents in court cases
Property Patter: the whys and wherefores of receivership
What is a fixed charge receiver?
Property Patter: the news so far on landlord challenges to retail CVAs
We review some of the recent high-profile landlord challenges to tenant CVAs,
Roger Elford quoted by React News on the use of restructuring plans
Restructuring plans can make it easier to overcome opposition from dissenting creditors.