Directors’ dividends can be unlawful – Global Corporate Ltd v Hale [2018]EWCA Civ 2618

Insights - 25/03/2019

Brexit uncertainty is causing increasing difficulty for SMEs and OMBs who are facing uncertain trading conditions.  It is worth remembering the example of Mr Hale, who was the director of Powerstation UK Ltd, which went into liquidation on 25 November 2015.  Mr Hale had been, like many of our clients, an owner/manager.  Like many of our clients, he paid himself by drawing a salary at the national insurance threshold along with £1,383 a month as dividend.  He did this for a number of years; and at the end of every financial year, his accountant would decide whether there were sufficient “distributable reserves” from which to pay the dividends and if there were not, the accountant would re-categorise the monthly dividend payments as PAYE salary.

The liquidators considered that the dividends paid to Mr Hale between 24 June and 26 October 2015, totalling £23,511 were unlawful dividends because the company’s accounts showed there were insufficient reserves from which to pay dividends (s830 Companies Act 2006).  The liquidators demanded repayment of £23,511 from Mr Hale and when he failed to pay, assigned their rights to the claim to Global Corporate Ltd (GCL), which brought proceedings against Mr Hale.

The High Court accepted Mr Hale’s argument that the payments were not unlawful because the payments made to him were not finalised at the time they were made, because his accountant had the ability to re-classify and reverse the payments at the end of the financial year. A claim for misfeasance also failed because the Judge found that even if Mr Hale was obliged to re-pay the money, he had an equal claim against the company for the value of his services ( a “quantum meruit” claim). This decision on misfeasance was inconsistent with Guinness Plc v Saunders [1990]2 AC 663, in which the House of Lords had held that quantum meruit claims had to be proved as a claim in the liquidation by the director.

The Court of Appeal overturned the High Court decision and has given some much-needed certainty in this area.  The Court of Appeal held that the monthly dividend payments were definitive – they were declared as interim dividends and taxed accordingly. The fact that the accountant could later change the nature of the payments did not stop them being dividends at the time the payments were made.

Learning points

  1. Companies must have sufficient distributable reserves to pay dividends at the time they are declared, even if they intend to reverse them later on if that turned out not to be the case;
  2. It is not possible to retract a dividend declaration (unless the company’s articles provide for it);
  3. A careful eye must be kept on the company’s performance.  In uncertain trading conditions, a company should consider increasing PAYE salary rather than run the risk of declaring an unlawful dividend, which can be clawed back by a liquidator.

If you have any questions or queries regarding the topics raised in this blog post, please contact Catherine Fisher, Partner and Head of Department either by email at [email protected] or by phone on 01483 215 357

Other articles from March's newsletter

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Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.