How To Avoid An Unlawful Dividend? This post arises from the case SSF Realisations Ltd v Loch Fyne Oysters Ltd & Ors  EWHC 3521 (Ch).
In this case, the shareholder and two of the Directors of the company in liquidation, SSF Realisations Limited (“the Company”) were held liable for unlawful dividends but a third director was not, thereby being excused.
One good way to find out how to avoid an unlawful dividend is to know what an unlawful dividend happens to be.
What Is An Unlawful Dividend?
A dividend is unlawful if it does not comply with the following:
- A company may only make a distribution out of profits available for the purpose
- There must be sufficient distributable reserves
- A dividend can only be drawn with reference to relevant accounts, being the last annual accounts or if that would amount to an unlawful dividend, then reference can be to interim accounts
- For the company’s last annual accounts (being those last circulated to members) to be relied on, they must have been properly prepared in accordance with the Companies Act 2006
- For interim accounts to be relied on, they must be accounts that enable a reasonable judgment to be made on the position as to distributable reserves
The matter considered claims brought by liquidators against directors and shareholders.
The company that paid the dividends in question, paid them to its shareholder Loch Fyne Oysters Limited (“LFO”). That position sprouted because of financial issues. However, before a purchaser of LFO would proceed to purchase LFO, it required the Company to be sold to a third party and nothing be owed from LFO to the Company.
The Company was due an intercompany debt from LFO and this was to be cleared by way of a dividend and a management charge.
To avoid liability for an unlawful dividend a director or shareholder will have to consider how a liability might arise.
Shareholder Liability For An Unlawful Dividend
The Court considered in detail how a shareholder could be liable legally for an unlawful dividend:
Director Liability For An Unlawful Dividend
The Court considered in detail how a director could be liable legally for an unlawful dividend:
Management Charges: How To Avoid An Unlawful Dividend
In this case the judge found that the Management Charge was in effect a dividend also.
The signs that the Management Charge was not accepted by the Court as a normal contractual relationship between the Company and LFO was because there was deemed to be no obligation:
Excusing A Director From Liability For An Unlawful Dividend
In this case Mr Lucas was a Director who was excused from liability because:
- he had no financial or accounting expertise at all
- other directors were the main decision makers on the board
- he had very limited involvement in the dividends that caused issues in the case
- he had no involvement in them after the board meeting that considered them
- although he was deemed conceivably in breach of duty as a director the Court considered them sufficient to relieve him of liability
If you would like us to help you resolve an unlawful dividend issue then Contact Us on a no-obligation basis.
How To Avoid An Unlawful dividend is not legal advice and not be relied upon. It is a post presented for information purposes only.