There is an argument that in certain circumstances greater prudence is now required from members dividends following the Court of Appeal case It's a Wrap (UK) Ltd (In Liquidation) v (1) Barbara Gula and (2) Anthony Gula [2006] EWCA Civ 544, which reverses an earlier High Court decision.

The case involved an insolvent company which had claimed repayment of dividends unlawfully paid to the defendants who were the only members and directors of the company. The company's liquidators successfully argued that the dividends had not been paid from "profits available for the purpose" and therefore the payments were made in breach of the Companies Act. The Act states that a member can only be required to repay a dividend where they knew (or had reasonable grounds to believe) that the payment was being made in contravention of the Companies Act. The High Court held however that merely knowing the facts without realising what they signified, as was the case here, was not enough to require repayment.

On appeal it was held that the company merely had to demonstrate that the defendants were aware of the facts that caused the contravention of the legal provision. The court noted the presumption that ignorance of the law is no defence and this will apply unless the provision in question is deemed to exclude it. The court held that since the members were aware there were no profits available to the company, they were deemed to know that the distributions were made unlawfully. This was notwithstanding the fact that they had acted on the advice of an accountant.

This case highlights the potential for difficulties where payment of a dividend precedes an insolvency situation. Directors who are also members should take particular care to ensure they have good advice on the availability of profits before declaration of a dividend.

George Boyle is a partner specialising in corporate finance with commercial law firm Shepherd and Wedderburn. 0141 566 8515

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