Unlawful dividends claims – directors personal liability risk affirmed

This is the next in the series of blogs for the Director’s Friend blog now with Taylor Rose TTKW solicitors in Hertfordshire and London.

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THE CASE

Lord Justice Patten recently handed down the lead judgment of the Court of Appeal in the case of Global Corporate Limited and Dirk Stefan Hale. The appeal concerned the trial judge’s dismissal of the claim to recover £23,511 as unlawful dividends.

The director Mr Hale had with the advice of his accountant received monthly interim dividend payments in the sum of £1,383.00. This is common in small owner managed companies and is generally more tax efficient. The payments were declared as such to HMRC.

The Claimant alleged that the Company was insolvent by reference to the last set of accounts and that there were insufficient distributable reserves to support the payment of the £23,511 as dividends. As such they were unlawful dividends to be repaid.

THE FINDINGS

At paragraph 17: ‘… it was apparent by the hearing that the dividend payments were unlawful distributions because the only relevant accounts for the purposes of s.836(1) CA 2006 were the accounts for the year ended April 2014. There had been no interim accounts during 2014/2015…‘ Also, no steps had been taken to reverse the process.

The Judge was criticised for the leading questions that he asked of the litigant in person Mr Hale and for making findings upon which there was no existing evidential basis (paragraph 19).

At paragraph 24: ‘Had [the Judge] focussed instead on whether the payments when made were lawful distributions of the company’s assets [as is required by law] there could only have been one answer.

Post liquidation of the Company (at paragraph 25) the director advancing an argument that they should be paid a reasonable sum for the services they rendered is an unliquidated claim for compensation to be proved in the liquidation.

The appeal was allowed.

COMMENT

Now that the law on unlawful dividend claims has been affirmed the well-advised director would need to ensure that they have supporting interim accounts that evidence profits from which dividends can be taken at the time. A failure by a director could be a breach of their duties as a director.

When a company is in financial difficulties such as when the accounts are showing that the company is making a loss then the well-advised director should immediately seek and obtain advice from the company accountant, a Licensed Insolvency Practitioner or an expert insolvency solicitor such as the Directors Friend. That is so that any potential personal liability for unlawful dividends can be attended to.

WHAT TO DO NOW (AND DO NOT DELAY):

If you are faced with:

  • worrying insolvency issues with your company; and / or
  • a claim against you for unlawful dividends / misfeasance / breaching your duties as a director to a company or any claim for personal liability

then please talk to Richard Cole today on +44 (0)1992 940 960 or +44 (0)203 540 4444.  This is in order to protect your position without delay.  The earlier that you speak with me the more that I can likely help.

The Director’s Friend is a Hertfordshire and London based solicitor and a full member of both the Insolvency Lawyers Association and the Association of Business Recovery Professionals.

Did you know that the Directors Friend is also a ‘poacher turned game keeper’ for defending director disqualification investigations?

Until the next time …

THE DIRECTOR’S FRIEND

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