Beware the Unlawful Dividend
The rules around the payment of dividends to shareholders have undergone clarification in the recent Court Appeal case of Global Corporate Limited v Hale.
Payments totalling £23,511 were paid by Powerstation UK Limited (‘the company’) to Mr Hale, its director and shareholder, between 24 June 2014 and 26 October 2015.
The payments were described as ‘interim dividends’ in a ‘dividend tax voucher’ prepared by the company’s accountants and presented to HM Revenue & Customs. The company went into liquidation on 25 November 2015, with a deficit of £173,594.99.
The liquidators were of the view that the payments made to Mr Hale were unlawful because at the relevant time, the company had insufficient distributable reserves of profits from which to pay dividends in accordance with section 830 of the Companies Act 2006.
The liquidators wrote to Mr Hale, requiring the repayment of the £23,511, and subsequently assigned their rights to Global Corporate Limited (‘Global’). Global then brought a claim against Mr Hale, stating that the monies were recoverable either as unlawful dividends, or, in the alternative, as a transaction at an undervalue or preference.
The High Court found that the accounting practice used by Mr Hale meant that the dividends were not finalised at the time they were paid.
The company’s accountants would review the books at the end of the year, and if there were insufficient distributable reserves then the dividends would be reversed and the payments taken through PAYE instead.
Indeed, this had happened in the previous two financial years. On this basis, the judge found that the payments were not unlawful because no decision as to whether or not they were dividends had been taken at the time the money was transferred.
Court of Appeal
The Court of Appeal overturned the High Court judgment, finding that the payments were ‘clearly distributions within the meaning of section 830 of the Companies Act 2006’. The Court of Appeal found that the High Court judge had wrongly focused on the intention of the directors when making the payments, rather than on the nature of the payments themselves.
Mr Hale had appeared in person in the High Court, and the Court of Appeal noted that ‘the judge’s use of long leading questions, in which the answer he considered to be correct was made all too obvious to Mr Hale, on an issue which had never before even been raised, went much too far in attempting to counter any perceived imbalance or inequality of arms’.
The Court of Appeal has therefore provided a useful clarification to the law surrounding the payment of dividends. Companies must always have sufficient distributable reserves to pay dividends; it is not enough to intend to ‘reclassify’ such payments at the end of the financial year if funds are insufficient.