Overview Of What Determines The Date Of A Dividend
The case of Manolete Partners Plc v Rutter & Anor [2022] EWHC 2552 (Ch) the well-known litigation company that buys or funds insolvency claims, Manolete Partners Plc, ran claims against a couple of company Directors that amongst other things considered what determines the date of a dividend.
For those who relish descending into the analysis of a judge’s deliberations over the Director and company dividend dilemmas, this case is certainly not to be missed.
Apparently according to the judgment the date of a company dividend appears never to have been decided by a Court previously. As you can see from this case that date disagreement was a major talking point.
What Were The Claims?
One claim was that of an unlawful dividend, another the overdrawn Director’s loan account and the final one was the use of company funds for personal purposes. The latter two claims succeeded but have not been granted any coverage in this article.
At the heart of this case was whether the dividend sprouted from the recording of an entry in Sage in April 2017 or when the Directors discussed the 2014-15 accounts with their accountant in July 2016.
As an aside a couple of notable points to cherry-pick from the bunch of issues fleshed out to which the reader of this judgment was treated:
- The importance of company ledgers is creating transactions.
- The importance of personal tax returns for company dividend litigation.
Company Ledgers Creating Transactions
Counsel for Manolete submitted the entry in Sage determined the date of the dividend as opposed to the discussion with the accountant about the 2014-15 statutory accounts. The Court flattened this line of argument:
…his premise was simply that there was no ‘distribution’ until the Sage entry because that was akin to ‘payment’. But that elevates an entry on an internal accounting record to the status of a payment into a bank account and indeed above the company’s statutory accounts. It assumes what it needs – and I find, at least here, fails – to prove.
Personal Tax Return Evidence For Company Dividend Transactions
It is common when seeking to assess credibility and looking at contemporary documents to consider the circumstantial evidence of whether or not a company dividend has found its way into a Director’s personal tax returns. In this case, the Court was not swayed by the fact that the dividend was found not to have been recorded in either of the Directors’ personal tax returns:
Mr Tabari also pressed Mr and Mrs Rutter whether they had declared that dividend in their personal 2014-15 income tax returns, which they have pointedly failed to disclose despite repeated requests. Whilst Mrs Rutter speculated that she had asked for them from Mr Langham, he denied having prepared them (which I accept). Tellingly, amid all his tall tales about Launde Lodge Farm in evidence, Mr Rutter, having started out with the same line as his wife, when pressed on this by Mr Tabari, rather sheepishly accepted that he probably did fail to declare it in his tax return. I find this was the case for both of them and sadly also echoes their failure to pay the Company’s Corporation Tax of just under £200,000 and various other tax liabilities which finally led to the winding-up petition. This reflects no credit whatsoever on them. However, the irony is if Mr Tabari is right that the £560,000 ‘dividend’ had no legal effect until April 2017, Mr and Mrs Rutter did not break the law in not declaring it for tax in the year 2014-15.
Why Did The Company Dividend Transaction Claim Fail?
It was interesting to note that the dividend in question had it seems been backdated into the 2014-2015 accounts of Rut 5 Limited that had gone into both Admninistration and then Voluntary Liquidation.
The timing of the £560,000 dividend (“the Dividend”) was a key issue because of the potential ability of the shareholders to ratify a breach of duty when a dividend has been declared without complying with the relevant legislation which is strict and mandatory.
It was interesting to see how the judge determined the date of the company dividend, being July 2016 when assessing Manolete’s arguments.
Positive Action For The Date Of A Company Dividend Transaction
It was accepted by the Court that in order for a dividend to sprout it cannot arise by accident or be assumed; it requires a positive act to be created. This appeared to take its lead from the construction of Section 829 of the Companies Act 2006.
The Court said that the decision to declare the Dividend was taken in July 2016 but recorded in the 2014-2015 accounts whereby the Directors’ Loan account in Other Debtors was reduced. The judge said:
Those statutory accounts did not predict or even constitute that whole transaction, they recorded it as having already happened: indeed, backdated it to the 2014-15 year. In my judgment, this is a clear and straightforward ‘distribution’ within s.829(1) CA as a question of fact.
The Court said the Dividend was a retrospective transaction:
…I am satisfied in July 2016, while they discussed the draft 2014-15 accounts, Mr Langham showed Mr and Mrs Rutter there were net profits after tax of £768,753, which with those from 2013-14 created a reserve of £809,423, but at the same time, the directors’ loan account indebtedness was £688,833.07. Mr and Mrs Rutter decided to declare a dividend of £560,000 and to off-set it against their directors’ loan account not in the future but retrospectively.
Effect On Shareholders Of A Dividend Transaction
The Court rejected the submission that a dividend must change the legal and tax position of the recipient shareholders because Section 829(1) refers to “… every description of distribution of a company’s assets to its members…” and it applies to both substance not just the legal structure of a transaction.
States Of Mind For the Dividend Date
The judge said that the transaction in July 2016 was a formal decision; it was what was said to be an:
‘accounting distribution’ recorded in the Company’s 2014-15 accounts
The judge developed his reasoning that the Sage posting on 12 April 2017 could not have had a higher rank than what had been put into statutory accounts:
Indeed, the Claimant is pushed into the strange position of arguing that one accounting transaction where no assets actually changed hands – the Sage entry in April 2017- was a ‘distribution’; whereas an earlier accounting transaction – recorded in the Company’s statutory accounts – was not. If so, a purely administrative exercise of adjusting a ledger that no-one outside the Company sees would be a ‘distribution’. But a transaction recorded in statutory accounts accessible to others outside the Company and affecting its tax position and indeed its distributable profits and reserves would not be. An internal journal entry would ‘trump’ the statutory accounts. Indeed, it would falsify them because it would over-ride the recording in the 2014-15 accounts (and Sage itself) that the dividend arose and was offset against the loan in July 2015. What apparently would matter is the date on which such a back-dated Sage entry happened to be made, here 12th April 2017. Indeed, it would not apparently matter who made the Sage entry, nor even if it was actually made without authority or even by mistake (unlike here). This could accidentally (or deliberately) skew the date of the ‘distribution’ outside of the control of the directors (who at least do approve the statutory accounts), let alone the shareholders, especially in larger companies. Parliament cannot have intended that result from the words it chose in s.829 that ‘distribution’ ‘means every description of distribution of a company’s assets to its members, whether in cash or otherwise’. Mr Tabari did not suggest any statutory purpose for such an interpretation – his premise was simply that there was no ‘distribution’ until the Sage entry because that was akin to ‘payment’. But that elevates an entry on an internal accounting record to the status of a payment into a bank account and indeed above the company’s statutory accounts. It assumes what it needs – and I find, at least here, fails – to prove.
Recording A Dividend In Company Accounts
The Court said the allocation of the Dividend to reduce a director loan account position and with the same recorded in the company accounts was a distribution within the meaning in Section 829, end of story, regardless of the legal effect of the matters:
To allow director-shareholders to argue that the use of a dividend to reduce their loan liability as recorded in the statutory accounts did not amount to a ‘distribution’ because it was not recorded in management accounts would create a lacuna in the coverage of Part 23 CA. It would undermine the protection it offers to the company and indeed to creditors; and create confusion on how much the directors actually still owe to the company. Indeed, a wide approach to ‘distribution’ is consistent with Part 23’s statutory purpose and indeed fair. Just because a transaction amounts to a ‘distribution’ does not mean it is unlawful. Lawfulness is assessed by reference to ‘relevant accounts’ under ss.836-8 and individuals’ knowledge under s.847 CA. If I may be permitted a florid metaphor, Parliament was obviously content to cast the net wide over ‘distributions’ in the knowledge that the holes in it are big enough to let the little fish swim free.
Interim Dividends
Although the matter was not considered in the evidence or submissions the judge reasoned that July 2016 was the Dividend date because it could have been an interim dividend ratified as the shareholders and directors, in this case, were the same people:
In any event, since those directors Mr and Mrs Rutter were also the only shareholders, they could potentially rely (subject, to the more general legality of the transaction) on the ratification principle – effectively rendering the ‘interim dividend’ a final one. Either way, their decision to pay a dividend – and indeed to formally record it in the statutory accounts as already paid in 2014-15 – created a debt to them amounting to a ‘distribution’. It distributed the company’s assets to them as members through a debt within s.829 CA even if it was not formally ‘paid’ at that time (as I have found it was).
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