“Illegal dividends to Directors, when insolvency occurs“
In this present time of uncertainty, with most companies having severe cash flow problems, it is worth pointing out that when a company goes into liquidation, HMRC are now looking at recuperating monies to creditors by looking at illegal dividends taken by directors in the period prior to insolvency.
Where a dividend is found to be illegal, the liquidator will pursue repayment, which can have a detrimental effect on the directors personally, as theses monies will need to be paid back to the company. The directors may also be left with repayment of personal guarantees that they may have provided. This can lead to the director being made personally bankrupt, or being forced to enter into an Individual Voluntary Arrangement (IVA) with their creditors to manage the debts.
Dividends to Directors are set out in Part 23 of the Companies Act 2006, and the most important provisions are:-
• s.830 – distributions can only be made out of realised profits available for that purpose.
• s.836 – in determining whether a distribution can be made, directors must refer to accounts showing the company’s profits, losses, assets and liabilities. These accounts must either be the latest annual accounts, provided they have been prepared in accordance with the Companies Act, or interim accounts.
• s.838 – if interim accounts are used, they must be sufficient to allow a reasonable judgement to be made as to the company’s profits, losses, assets and liabilities.
In addition, the directors will also be liable to repay the dividends in their capacity as directors if, in paying the dividends, or recommending to themselves as shareholders that the dividends be paid, they have breached their fiduciary duties to the Company set out in s.171 – s.177 of the Companies Act 2006.
Any accounts prepared should show that the Company is solvent at the time of the dividend and the key questions are whether those accounts showed a sufficient distributable profit, whether they were sufficiently detailed to allow a reasonable judgement to be made, and whether it was in the interests of the Company, that the dividend be paid. If the dividend was paid unlawfully, the director/shareholders will very likely be liable to repay them, on the grounds mentioned.
Finally, the dividends could also amount to a preference which can be attacked by the liquidator.
It is therefore vital for directors to take advice earlier rather than later to ascertain if they could be pursued for an illegal dividend in the event of insolvency. If only draft accounts have been prepared, this may go against the director if any dividends have been made and advice should be sought on the implications on the Directors personally. DCA offers initial consultation in confidence, without charge.
To arrange an informal meeting, please contact Debbie Cockerton on 01702 344558 or take advantage of our “UK Recovery Helpline” which operates 7 days a week, (8am to 8pm) on 0800 066 2544.