English Court Of Appeal Provides Clarification Regarding The Regulation Of Dividend Payments To Shareholders

Introduction

In the recent case of Global Corporate Ltd v Hale1, the Court of Appeal was asked to assess whether sums, described as "interim dividends", paid to Mr. Hale (the "Respondent") in his capacity as both a director and shareholder of Powerstation UK Limited (the "Company"), had been made in accordance with section 830 of the Companies Act 2006 (the "Act")2 prior to the Company's insolvency.

In doing so, the Court of Appeal's Judgment has provided welcome clarity regarding the regulation of dividend payments to shareholders, and is therefore of interest both to companies seeking to declare dividend payments and insolvency practitioners who are considering whether to challenge the validity of such payments made prior to a company's insolvency.

Background

The Respondent had been one of two shareholders in, and directors of, the Company. He was paid a small salary each month to cover national insurance contributions, which was supplemented with a separate dividend payment. At the end of each financial year, if there were insufficient distributable profits from which dividends could be declared in accordance with section 830 of the Act, the Company's accountants would re-characterise the payments to form part of the Respondent's salary and additional tax would be paid to HMRC. On that basis, each such payment was recorded as an "interim dividend" in a "dividend tax voucher" prepared by the Company's accountants for HMRC.

Following the liquidation of the Company in November 2015, the liquidators considered that the Company had insufficient distributable reserves from which the dividends could be made and, thus, claimed that they were in breach of section 830 of the Act. After the Respondent refused to repay these sums, the liquidators of the company assigned their rights to...