When is an interim dividend actually payment for a director’s services?

Published on
3 min read

In Global Corporate Limited v Hale (decided 13 September 2017) the court dismissed a claim for repayment of interim dividends received by a director of an insolvent company, finding that the director was entitled to be paid for work done. This is an alarming precedent for liquidators.

In Global Corporate Limited v Hale (decided 13 September 2017) the court dismissed a claim for repayment of interim dividends received by a director of an insolvent company, finding that the director was entitled to be paid for work done. This is an alarming precedent for liquidators.

The director-shareholder had been paid by way of a basic salary plus a monthly sum intended to represent dividends. Interim dividends were declared monthly and a tax certificate signed. The accountant reviewed the books annually to ensure that there were sufficient reserves. In previous years the accountant had determined that there were insufficient reserves and had re-characterised payments as salary.

Provisional decision or final?

The Court focussed on the status of the director’s decision to make a monthly dividend
payment.

Although the director had signed tax dividend forms each month, the judge concluded that the director was aware that he wouldn’t know for certain if there were sufficient profits until year end. He concluded that the director did not think that he was making definitive decision about declaring dividends monthly.

Any dividend at all?

The court held that the decision to declare dividends monthly was only “in principle”, with the final decision to be made later. The consequence was that no dividend was actually declared. So although payments were made to the director, they were not dividends, and therefore could not be unlawful within the Companies Act 2006.

Unjust enrichment of the company

The next point was whether the director’s decision to approve the payments was a breach of his fiduciary duties. The judge explored whether the director had a claim against the company for the value of the services provided by him – if he was not paid, there would be unjust enrichment of the company to the value of the work the director did.

The director’s evidence made clear that the idea of paying himself in dividends was a scheme advised by the accountant to save tax on the income for the work he did for the company. Therefore in causing the company to make the payments, the director was simply causing the company to satisfy its liability to pay for his services, which was not misfeasance. Nor could it be a transaction at an undervalue, as value had been provided for the payments in the form of work done.

Preference

The Claimant was the assignee of claims from the liquidator. However, a preference claim did not fall within the assignment and the court was not prepared to decide the point in this case.

The claim was dismissed.

Commentary

Accountants commonly advise director-shareholders to draw a combination of basic salary and dividends. Received wisdom had been that the director was at risk in respect of interim dividends if the company ultimately did not generate expected profits.

The Global decision gives rise to the alarming possibility that such a director simply needs to argue that his decision to draw dividends was provisional, and that the company expected to pay for his work come-what-may in order to resist a claim.

This is an unhelpful decision for liquidators bringing unlawful dividend claims. However, there are a number of ways you could differentiate your case:

  1. Global only deals with dividends drawn on account, not where final accounts have been prepared.
  2. In Global the accountant had previously reallocated dividend payments as salary, rather than to the loan account.
  3. Were the dividends excessive when compared to the value of the work done by the director?
  4. The issue of preference remains to be decided.

For further information, please get in touch with Helen Fyles.

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