Our Knowledge

20.Oct.2017

Recovery of interim dividends?

In a recent High Court decision, the court found that interim dividend payments made to a director were salary payments and not unlawful dividends/transactions at undervalue. This decision could make it more difficult for liquidators to recover sums from directors who do not have particular legal or accounting expertise.

Background 
The directors of Powerstation UK Ltd (the company) were paid through a combination of salary and dividends.  Following the advice of the company's accountants, the directors received the minimum monthly salary to ensure their National Insurance contributions were paid, and any excess as a dividend.  Unusually, the director signed dividend tax forms each month.  

After the company entered CVL in November 2015, the liquidator queried dividends of around £23,000 paid to the director although the accounts for the year ended April 2014showed a loss of around £8,000.  

A claim was raised against the director for unlawful dividends, misfeasance and transactions at undervalue/preference.

Did the company declare and pay a dividend each month?
Notwithstanding the dividend tax forms signed by the director, the court found that the company did not in fact declare and pay a dividend each month.  Instead, the court considered that the director did not think he was making a definitive decision to declare a dividend, as he knew any formal declaration of a dividend needed to be made after the accountant had considered whether there were distributable reserves at the end of the financial year.

The director was an engineer who did not have any legal or accounting background, and appeared to have followed the advice of the company's accountant. The judge considered it was obvious that the director did not see the apparent contradiction in signing the dividend tax forms as each payment was made, but only formally declaring a dividend at year-end.  

The court did not consider the director breached his duties as he was causing the company to discharge a liability incurred as a result of the services he supplied to the company. In fact, the judge considered the company would be unjustly enriched if the director was not remunerated at the agreed rate above his nominal salary.  

The court did not consider there was a transaction at undervalue as the company received the benefit of the director's services in exchange for the payments made.  

Assignment of the liquidator's claim 
The liquidator of the company assigned the potential debt due to the company to Global Corporate Limited for £950.  The judge indicated that the applicant could have an issue in terms of title to sue for misfeasance and any claim to set aside a preference as these were not provided for in the deed of assignment.  

Conclusion 
On the facts of this case, perhaps assisted by the relatively modest sums paid to the director, the court was prepared to show flexibility in examining the sums paid to the director. However, this is an indication that directors without particular legal or accounting expertise could be held to a lower standard. This is inconsistent with previous case law, and is unhelpful for liquidators looking to recover sums from directors.  

The difficulties the court had with the precise rights transferred under the deed of assignment act as a reminder that such documents should be carefully drafted.