We reported on the case of It's a Wrap (UK) Ltd (In Liquidation) v (1) Barbara Gula and (2) Anthony Gula [2005] EWHC 2015 (Ch) in our December e-bulletin. This decision has now been overturned by the Court of Appeal (It's a Wrap (UK) Ltd (In Liquidation) v (1) Barbara Gula and (2) Anthony Gula [2006] EWCA Civ 544).

At first instance, the English High Court held that no liability arises to repay unlawful dividends unless the member receiving the dividend knew or had reasonable grounds to believe that such payment was being made in contravention of the Companies Act 1985.  The insolvent company claimed repayment of dividends unlawfully paid to the defendants who were the only shareholders and directors of the company.  The liquidators of the company argued on its behalf that the dividends had not been paid from "profits available for the purpose" and therefore were in breach of the Companies Act.  The defendants claimed that the payments made to them were noted as dividends in the accounts on the advice of their accountants but in actual fact they had been taken as salary. The court held that the payments were dividends not salary.  However the court further held that while the defendants were aware that the company had made losses, they did not appreciate that a payment of a dividend in these circumstances was illegal.  A member can only be required to repay a dividend under the Act where they knew (or had reasonable grounds to believe) that the payment was being made in contravention of the Companies Act. Merely knowing the facts without realising what they signified was not enough.

On appeal, case law was cited to the effect that a person is deemed to be aware of the content of European Community legislation from the moment when it is published in the Official Journal (Friedrich Binder GmbH & Co KG v Hauptzollamt Bad Reichenhall (1989) ECR 2415 applied). There is a general presumption that to be in ignorance of the law is no defence and this presumption will apply unless the legal provision in question is deemed to exclude this presumption. The legislation in question in this case was section 277(1) of the Companies Act which implements Article 16 of the Second Council Directive 77/91. It provides for the recovery of a dividend paid unlawfully to a shareholder where the shareholder was aware there was a contravention of the statutory provisions in respect of dividends or had reasonable grounds to believe this was the case. Therefore, the Company merely had to demonstrate that Mr and Mrs Gula were aware of the facts of the matter which resulted in a contravention of the legal provision in question. It was held that since they were aware that there were no profits available to the Company, they were deemed to know that the distributions were made unlawfully. Mr and Mrs Gula were therefore required to repay the dividends. This was notwithstanding the fact that Mr and Mrs Gula had acted on the advice of an accountant.

 

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