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Illegal Dividends

Introduction

It has recently been decided by the Court of Appeal in Global Corporate Limited v Dirk Stefan Hale [2018] that dividends which constitute unlawful distributions are illegal when they are made and cannot be re-categorised by subsequently treating them as director’s remuneration (Remuneration).

The facts were, as is often the case with small owner managed companies, regular monthly payments made to a director (who was also a shareholder) had been treated as Remuneration up to the personal allowance limit and ‘dividends’ above such limit.

At the end of each year, the company’s accountants would review the payments made to the director and, if there were insufficient distributable reserves for them to be dividend payments, they would be treated as Remuneration.

The company went into liquidation before this exercise had been carried out in respect of the dividends in dispute and the claimant sought repayment on the basis that the dividends were unlawful distributions due to insufficient reserves.

Court of Appeal

The Court of Appeal decided that the payments when made were expressly declared as dividends. The payments were distributions within the meaning of the Companies Act 2006 when they were made and that is the time when their legality must be tested. The distributions were unlawful. Re-categorising them as Remuneration could not cure the illegality of the original payments.

Conclusion

Be sure that your company has sufficient reserves to pay dividends before they are declared.

Contact Richard Jenkins on 07837 762705 or Richard@clariclegal.co.uk for further advice or assistance.

This should not be relied upon for legal advice.

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