Legal dividend in dispute

[chasingunicorns]

I wonder if anyone can help me out here. I was an ordinary shareholder of a company which went into liquidation. During their final year of trading, I was paid dividends in lieu of wages. I am now being persued for their repayment as the company (apparently) did not have sufficient cleared funds to pay me and therefore the dividends are deemed illegal. I have already been through the process of explaining (via a solicitor) that, as I had no intimate knowledge of the company accounts, I am not necessarily bound to repay the dividends, illegal or no. As the 2006 Companies Act was in force at the time, this would be correct. Now, after 9 months of no contact, another different law firm has written to me asking yet again for repayment or their client is at liberty to issue court proceedings. This law firm is working on a Conditional Fee Agreement, by the way. The liquidators and their first set of solicitors have all the correspondence regarding this and I haven't changed my position. Do I have to repond to this latest letter or should I just wait and see if they choose to take me to court or not?

 

[chasingunicorns]

Sorry folk - again - due to technical error - again - this is repeat of post entitled 'repayment of illegal dividend to non-director shareholder' but all views most gratefully received!

 

[elaine@cheapaccounting]

You might want to read this:

Paying yourself by a monthly dividend - tax efficient or potential timebomb?

http://www.cheapaccounting.co.uk/blog/?p=1650

 

[chasingunicorns]

Thank you. This makes interesting reading but I was not a director nor had anything do do with the day to day running of the company nor its finances so I don't believe the same rules apply...I could be wrong.

 

[elaine@cheapaccounting]

I would note ....

• Profits available for distribution will normally be by reference to the last annual accounts but where such accounts are either not available or do not show distributable reserves properly prepared management accounts or interim accounts may be used.

• The power to declare dividends generally lies with the shareholders at a general meeting but cannot exceed the amount recommended for payment by the directors. The directors are usually authorised to pay interim dividends which are subsequently approved by shareholders at AGM.

How did the dividends get approved by the shareholders?

Without knowing more about the company set up it is difficult to say more on this.

 

[jules12345]

I wonder if anyone can help me out here. I was an ordinary shareholder of a company which went into liquidation. During their final year of trading, I was paid dividends in lieu of wages. I am now being persued for their repayment as the company (apparently) did not have sufficient cleared funds to pay me and therefore the dividends are deemed illegal. I have already been through the process of explaining (via a solicitor) that, as I had no intimate knowledge of the company accounts, I am not necessarily bound to repay the dividends, illegal or no. As the 2006 Companies Act was in force at the time, this would be correct. Now, after 9 months of no contact, another different law firm has written to me asking yet again for repayment or their client is at liberty to issue court proceedings. This law firm is working on a Conditional Fee Agreement, by the way. The liquidators and their first set of solicitors have all the correspondence regarding this and I haven't changed my position. Do I have to repond to this latest letter or should I just wait and see if they choose to take me to court or not?

If the other company is in liquidation it will probably be the liquidators that require the money. If the company has been to seen to pay in preference to a connected person then the payment can be voided. (S.249)

 

[Alan R Price]

As an insolvency practitioner I would say OP has a problem. Illegal dividends are just that. Dividends should be voted by shareholders and can only be authorised up to the legal amount. A liquidator can recover illegally paid dividends.

I mean no disrespect to jules12345 however a preference can only be given to a creditor on account of a debt owed to him. A shareholder is not a creditor as such.

 

[jules12345]

As an insolvency practitioner I would say OP has a problem. Illegal dividends are just that. Dividends should be voted by shareholders and can only be authorised up to the legal amount. A liquidator can recover illegally paid dividends.

I mean no disrespect to jules12345 however a preference can only be given to a creditor on account of a debt owed to him. A shareholder is not a creditor as such.

No offence taken in fact I thank you for that.

Alan if a person lends a company 100,000 and determines the loan will be repaid by dividends, is he a creditor ? For eg he may say - 100,000 buys me 50,000 shares but i take 100,000 and the dividend pays off the loan then i give you back 50,000 ... is he a creditor ?

Regards
Jules

 

[David Griffiths]

As an insolvency practitioner I would say OP has a problem. Illegal dividends are just that. Dividends should be voted by shareholders .

But in practice, even for Plcs, the dividend is declared by the directors not the shareholders. They may be ratified by shareholders at an AGM, but if the company goes through that tends not to happen and most small companies don't hold AGMs. From an IP point of view, what is the position relating to such dividends if the company had the reserves available when they were declared?

Given that the OP was a shareholder and not a director, he or she was not a party to the declaration and received and spent the money in good faith. I don't have time to look for a reference at the moment, but I am sure that I have read of cases where somebody in such a situation was not held liable to repay the dividends.

 

[chasingunicorns]

This was a very small company. There were no AGM's. The directors were a man and wife team. The shareholders numbered six at most. The directors decided to pay 'dividends' in lieu of salary, without issuing any dividend certificates. They did not inform the recipients that was what they were doing, they just stopped issuing payslips for that period, and when asked for them, told employees that they were changing their accountant and bank and it would all be sorted out soon...they they dissolved the company and left the country.

David Griffiths, if you do get the time, I would be really grateful if you can source reference. If I am taken to court, I shall have to conduct my own defence and any information is grist to the mill. I must admit that I have trawled the internet for such instances but the only reference I can find is 'It's a Wrap' which concerned director/shareholders, not ordinary bods like me.

 

[BCR Insolvency]

Stepping in here and hopefully not on Alan's toes, but I am also an Insovlency Practitioner, so Jules12345:

If somebody lends £100,000, they are a creditor for £100,000. If they are also a shareholder and dividends are declared but not paid to them then they may be added to the balance owed to them as a creditor.
If £100,000 buys 50,000 shares though (that's 1 share = £2) then that person is a shareholder and not a creditor. If a subsequent dividend is declared and not paid then that person becomes a creditor for their unpaid dividend.
If a person lends £100,000, which is later converted into shares then that person changes from a creditor to a shareholder.
I'm a little confused by the last part of your question, so please provide some more guidance.

David Griffiths:
If the company had distributable reserves (as defind by CA85 or CA06 as appropriate) then any dividends are not unlawful and cannot be clawed back by an IP as unlawful dividends. BUT consideration may be given by the IP as to whether declaring the dividend could have been a breach of the directors fiduciary duties to the company and its creditors.
The Good Faith argument is a good and reasonable defence and has been used successfully by a number of people, but the bar for Good Faith was raised last year in a bankruptcy matter, so it may not be a feasible one, although any defence does of course make the applicant wary of an unfavourable outcome.

Chasing Unicorns:
Are these illegal dividends or not? No dividend vouchers, no payslips, you indicate you had divis in lieu of salary but then say when the directors did not inform people what they were doing and when questioned they said they were changing accountant - so what did you receive? I would say it is pretty unclear unless you have acknowledged you received dividends - e.g. what did you put on your own tax return for the relevant period?
Going back to the position of Good Faith - you may well be unsuccessful for the following reason - you were entitled to the accounts as a shareholder, you would have seen the distributable reserves, if you accepted dividends in excess of the reserves then you ought to have reasonably known the company could not afford to pay them.
The Its a wrap case did concern directors/shareholders and the initial decision did afford them defence for their ignorance of the law, the the court of appeal overturned this decision and said ignorance was no defence, but the principles on which that case was decided could have been extended to any other situation such as yours because it was to do with knowing about the irregularoty and your ability to discover it. Section 847 of the CA06 also clearly points out your liability to repay if you knew or had reasonable grounds to supsect it was unlawful.

I think you may struggle, but you never know on the day, sympathetic judge and all that. I would consider the position of dividends v salary and what did you actually receive, not what it is claimed you may have received.

I hope this helps

Kevin Lucas

 

[Alan R Price]

No offence taken in fact I thank you for that.

Alan if a person lends a company 100,000 and determines the loan will be repaid by dividends, is he a creditor ? For eg he may say - 100,000 buys me 50,000 shares but i take 100,000 and the dividend pays off the loan then i give you back 50,000 ... is he a creditor ?

Regards
Jules

Sorry for the delay in responding, caused by holidays and then catching up!

A dividend cannot repay a loan. A dividend is a distribution of the retained profits of the company, the size depending on the number of shares held.

A loan is repaid out of cash assets and is dependent only on the size of the loan - it is completely independent of the shareholding. For example I can invest £100,000 in a company divided into £40,000-worth of shares and £60,000-worth of loans. The loan would be repayable up to the limit of £60,000 (plus any interest), while I would receive dividends on my £40,000 shareholding, depending on how profitable the company was.

In normal circumstances (and there are exceptions) a shareholder is not entitled to redeem his shares although he can sell them to another person or company for an amount agreed between them. This is an entirely separate transaction from anything the company might do.

 

[chasingunicorns]

Thank you to all for your thoughts and suggestions. Kevin 'you would have seen all distributable reserves'. I saw nothing! The directors didn't hold any meetings for shareholders until they wound the company up and that meeting certainly didn't involve sharing the company accounts. Their accounts were submitted to companies house well after the period of time in question so I couldn't even have accessed them then. I was under the impression I was still receiving salary - as before, and as after, until the company went under (owing me 3 months' salary). I kept asking for payslips. I don't fill in a tax return - HMRC have never sent me one nor a request to submit one. I received remuneration every month which I was later informed, by the IP, was marked on the company bank statements as 'dividend'. But I received no paperwork to support this. I was home-based, working 'on the road' most of the time, some 100 miles away from the main office. I was not part of the day-to-day running of the company and had no access to the accounts, nor was given the opportunity to see or discuss them in detail. Asking to see something, or receive something is very different from being granted that request! When you are an employee, you are at the mercy of your employer. Even HMRC won't chase an employer for payslips because they don't generate any revenue from doing so. So I asked and asked until the company ceased to exist.

 

[Alan R Price]

This sounds as though it is a little more involved than at first sight and anybody advising you needs to know all the relevant facts. There seem to be evidential issues which make the situation rather less straightforward than they appear. Since we are probably talking about several thousand pounds or more my advice is that you take specialist legal advice asap. I can recommend an experienced insolvency solicitor if you like or you may be able to find one in your locality; but get a specialist, not an ordinary high street generalist.

 

[chasingunicorns]

Thank you Alan. The frustrating thing is, I have already instructed a solicitor, exchanged correspondence, solicitors' letters and followed all the necessary and proper legal paths on this matter, all the time regularly (in the final para of each letter) being threatened with legal proceedings. Now, nearly a year later, still no summons but a fresh demand from a completely different law firm, enlisted by the IP. So why do I need to repeat the very same process when the IP has all the documents and correspondence in his hands? If he was going to take me to court, wouldn't he have done so the first time round with his original law firm? Or is he just going to instruct solicitor after solicitor, making the same claim, until I buckle under and pay what he is demanding?

 

[Nathanto]

The shareholders numbered six at most. The directors decided to pay 'dividends' in lieu of salary, without issuing any dividend certificates.

Did the amount of your and your colleague's monthly pay cheque change when this happened?

Assuming you and your colleagues don't all earn the exact same amount and don't all have the exact same shareholding then it would seem that a dividend wasn't paid regardless of how it was described in the accounts.

 

[Alan R Price]

Thank you Alan. The frustrating thing is, I have already instructed a solicitor, exchanged correspondence, solicitors' letters and followed all the necessary and proper legal paths on this matter, all the time regularly (in the final para of each letter) being threatened with legal proceedings. Now, nearly a year later, still no summons but a fresh demand from a completely different law firm, enlisted by the IP. So why do I need to repeat the very same process when the IP has all the documents and correspondence in his hands? If he was going to take me to court, wouldn't he have done so the first time round with his original law firm? Or is he just going to instruct solicitor after solicitor, making the same claim, until I buckle under and pay what he is demanding?

It's easy for me to say, I know but it seems to me as though the IP isn't really confident in his case. Your solicitors (are they specialists?) should be telling him to "put up or shut up". He can't go on harassing you indefinitely. You (or your lawyers) say you don't owe the money and have presumably told him as such. He must therefore either issue proceedings or go away and leave you alone.

 

[jules12345]

Did the amount of your and your colleague's monthly pay cheque change when this happened?

Assuming you and your colleagues don't all earn the exact same amount and don't all have the exact same shareholding then it would seem that a dividend wasn't paid regardless of how it was described in the accounts.

I think I agree with this. Also you havent been to court, and as such the IP can change his solicitors and make claim as many times as he wants as long as he has good reason. He isnt necessarily harrassing you, just because he changed his solictors.


Regards
Jules

 

[jules12345]

By my understanding they have paid your wages first because your a shareholder but paid you no dividend and paid no wages to the other employees.

Wages obviously must be paid before dividends are paid.

This is a preference and as such (they paid your wages BECAUSE your a shareholder and called them dividends - meaningless what they called them.) the IP can claim this money back from you and you become a creditor as they owe you (after you pay money back) for your wages.

Regards
Jules

 

[BCR Insolvency]

I agree with many of Alan's comments - 1, you need a specialist insolvency lawyer - without one you are likely to be wasting money - it's a complex area, 2, I'd agree that it doesn't really sound like the IP is confident in his case - the fact it says dividends on the bank statements doesn't mean a thing! if it said Fraudulent payments and the monies were going to HMRC, does that mean the liquidator would take HMRC to task over receiving payments called 'fraud'.

Jules12345 - not sure the preference consideration would get very far at all and if the Liquidator thought it was worth pursuing this he should have brought an action that listed this as an alternative remedy if the other bit wasn't successful.

Chasingunicorns, Re the access to the accounts - shareholders and directors are entitled to the info - ignorance of this is unfortunately no defence - if you asked and you didn't get, can you evidence this? Did you make written demand or get a solicitor to do it? If not, then unfortunately this is simply a lesson for the future.

Good luck
Kevin Lucas

 

[jules12345]

Jules12345 - not sure the preference consideration would get very far at all and if the Liquidator thought it was worth pursuing this he should have brought an action that listed this as an alternative remedy if the other bit wasn't successful.


Good luck
Kevin Lucas

I mean this (preference) is the grounds on which the IP is claiming the money. She was paid preferentially, and yes she was a creditor.

 

[BCR Insolvency]

Ahhh
I thought you meant a Preference under Section 239 Insolvency Act, not just using the word preference.

Regards

Kevin

 

[chasingunicorns]

Just to let everyone who contributed thoughts and solutions to this issue, the liquidators decided not to contact me again. They have now concluded their business and closed the case. Thankfully it is out of statute now anyway so further claims would be invalid. Thank you for all your help.

 

[nelioneil]

Just to let everyone who contributed thoughts and solutions to this issue, the liquidators decided not to contact me again. They have now concluded their business and closed the case. Thankfully it is out of statute now anyway so further claims would be invalid. Thank you for all your help.

Nothing like a happy ending, stick around!

 

[Alan R Price]

Just to let everyone who contributed thoughts and solutions to this issue, the liquidators decided not to contact me again. They have now concluded their business and closed the case. Thankfully it is out of statute now anyway so further claims would be invalid. Thank you for all your help.

A great result! It was a try-on, then.

 

[pumproom]

Just to let everyone who contributed thoughts and solutions to this issue, the liquidators decided not to contact me again. They have now concluded their business and closed the case. Thankfully it is out of statute now anyway so further claims would be invalid. Thank you for all your help.

It always worries me the term 'out of statute' can anyone tell me what the time limit is for claiming. It seems to me that if a claim has started no matter how long it takes it can never run out of time. And also when does a claim start, at the inception of the legal process involving solicitors and courts or when a letter is sent from say a Creditor stating what is owed?

 

[Alan R Price]

It always worries me the term 'out of statute' can anyone tell me what the time limit is for claiming. It seems to me that if a claim has started no matter how long it takes it can never run out of time. And also when does a claim start, at the inception of the legal process involving solicitors and courts or when a letter is sent from say a Creditor stating what is owed?

Here is a link to a very readable Wikipedia article about the Limitation Act 1980, which explains things in layman's terms.