Liquidation - Dividends

[Anni71]

Still undergoing a lengthy liquidation process for a small business as a contractor. Alway took dividends out - hit by contracts in 2020/21 due to Covid. Cash reserve of 100k at the start of that year so continued to take dividends whilst seeking new contracts until 2021. Contract came through in 2021 but had to be under IR35 so liquidated. Only debt was the BBL. All tax paid. They are now seeking that the dividends were illegal and asking pay back even though that would be double owed to the creditors? Very anxious. As I would not have liquidated if this had been highlighted.

 

[fisicx]

Dividends are paid from your profits not the bank balance. I suspect the liquidator is correct. Which means the money will need to be paid back.

I’m sure one of the insolvency experts will be along in the next couple of days with a definitive answer.

 

[Anni71]

Dividends are paid from your profits not the bank balance. I suspect the liquidator is correct. Which means the money will need to be paid back.

I’m sure one of the insolvency experts will be along in the next couple of days with a definitive answer.

Thank you. The Retained profits at the Start of the year were 100k accounting for the future corporation tax and VAT was 0.

 

[DWS]

Thank you. The Retained profits at the Start of the year were 100k accounting for the future corporation tax and VAT was 0.

What was the BBL spent on?

 

[Elliot Green]

Still undergoing a lengthy liquidation process for a small business as a contractor. Alway took dividends out - hit by contracts in 2020/21 due to Covid. Cash reserve of 100k at the start of that year so continued to take dividends whilst seeking new contracts until 2021. Contract came through in 2021 but had to be under IR35 so liquidated. Only debt was the BBL. All tax paid. They are now seeking that the dividends were illegal and asking pay back even though that would be double owed to the creditors? Very anxious. As I would not have liquidated if this had been highlighted.

Cash reserves are not necessarily distributable reserves.

The amount owed to creditors doesn't usually include the costs of Liquidation.

 

[UK Contractor Accountant]

What was the BBL spent on?

dividends by the sound of it

 

[Gyumri]

Thank you. The Retained profits at the Start of the year were 100k

Then you were entitled to draw out that sum as dividends. However the liquidator may want to have a bun fight about it being a preference payment but as the company only owes a BBL then I would refuse to refund anything.

A liquidator might start throwing his toys out of the pram, but who knows?

 

[Lisa Thomas]

Thank you. The Retained profits at the Start of the year were 100k accounting for the future corporation tax and VAT was 0.

But there was still a contingent debt outstanding in respect of the BBL...?

 

[DWS]

Then you were entitled to draw out that sum as dividends. However the liquidator may want to have a bun fight about it being a preference payment but as the company only owes a BBL then I would refuse to refund anything.

A liquidator might start throwing his toys out of the pram, but who knows?

But what if the BBL was used to pay Dividends?

 

[Anni71]

Thank you - yes I think this is the case. They also promised we were entitled to redundancy but failed to do anything about it and have not kept us informed with anything - just questions. We were investigated under directors disqualification and cleared without the need for a solicitor too!

But there was still a contingent debt outstanding in respect of the BBL...?

we had a contract which would have seen the business back to 100k. Problem was they then insisted it was under IR35. The whole process at the end was a nightmare. It was the BBL who advised us to liquidate…

 

[pentel]

Problem was they then insisted it was under IR35

Did your take up this contract?

 

[Anni71]

Did your take up this contract?

Yes - does that make it worse?

 

[Newchodge]

They also promised we were entitled to redundancy but failed to do anything about it

Did you have a contract of employment with your limited company? Were you paid at least Minimum Wage for all the hours you worked, or did you just receive around £12,000 as salary and take the rest as dvidends?

 

[Anni71]

Did you have a contract of employment with your limited company? Were you paid at least Minimum Wage for all the hours you worked, or did you just receive around £12,000 as salary and take the rest as dvidends?

Minimum salary and low dividends.

 

[Newchodge]

Minimum salary and low dividends.

If the salary was not at least equal to minimum wage for every hour you worked, you were not an employee and only employees are entitled to redundancy pay.

 

[Elliot Green]

But what if the BBL was used to pay Dividends?

Using a BBL to pay dividends typically would not satisfy the economic benefit test.

 

[DWS]

Using a BBL to pay dividends typically would not satisfy the economic benefit test.

Which is exactly why I asked the question to the other poster.
If the BBL was used to pay Dividends and I am not saying it was I don’t think the OP answered what it was spent on, but if it was then the dividends may well be unlawful.

 

[ChrisCallaghan]

The amount owed to creditors doesn't usually include the costs of Liquidation.

Hi @Elliot Green , I'd appreciate your thoughts on this, and @Lisa Thomas .

My thoughts have always been that when a liquidator looks to collect a DLA, that said director is only liable up to the balance of the company's creditors. Others have argued that a director is liable for a DLA up to the company's liabilities PLUS the costs of the liquidation.

What are your thoughts?

 

[Elliot Green]

Hi @Elliot Green , I'd appreciate your thoughts on this, and @Lisa Thomas .

My thoughts have always been that when a liquidator looks to collect a DLA, that said director is only liable up to the balance of the company's creditors. Others have argued that a director is liable for a DLA up to the company's liabilities PLUS the costs of the liquidation.

What are your thoughts?

It is neither. They are liable for the full ODLA. There's case law on this.

The matter of liability is unaffected by the circularity point which arises when the director is the shareholder. The court will however often limit the amount the director has to pay to stop money going around in a circle. However costs of Liquidation do not get excluded from the calculation.

If the ODLA is assigned then the level of creditors and costs of Liquidation often can be simply irrelevant. That is why it is a good idea for a director to sort out the OLDA with alacrity to avoid the debt ballooning if it were to be assigned.

 

[Elliot Green]

Which is exactly why I asked the question to the other poster.
If the BBL was used to pay Dividends and I am not saying it was I don’t think the OP answered what it was spent on, but if it was then the dividends may well be unlawful.

The test for an unlawful dividend isn't usually known to be the same as the economic benefit test for deployment of a BBL.

 

[ChrisCallaghan]

It is neither. They are liable for the full ODLA. There's case law on this.

The matter of liability is unaffected by the circularity point which arises when the director is the shareholder. The court will however often limit the amount the director has to pay to stop money going around in a circle. However costs of Liquidation do not get excluded from the calculation.

Thanks Elliot. To be fair that logic is sound and should've been obvious now that I think about it.

That is why it is a good idea for a director to sort out the OLDA with alacrity to avoid the debt ballooning if it were to be assigned.

My logic also and my approach with any potential client. My query is more in relation to an accountant contact who's client encountered a similar scenario to OP's.

 

[DWS]

The test for an unlawful dividend isn't usually known to be the same as the economic benefit test for deployment of a BBL.

I thought (maybe wrongly) that it had been established years ago that the use of a BBL to pay Dividends would result in them being unlawful and in breach of the Companies Act 2006, the whole idea behind the BBL was to provide businesses with working capital to get through the pandemic.
To my mind if the Company has paid dividends when there has not been enough distributable profit then this would deem them unlawful, they then would surely become a Directors Loan and not a Dividend which should be repayable to the Company to cover its debts.
I am speaking as an Accountant and would like an IP to give their take on this and how they would be dealing with it during a liquidation.

 

[ChrisCallaghan]

Hi @DWS ,

I'm sure Elliot will provide a much more technical answer than me, but my practical answer below:

The issue of a DLA and BBL misuse are two separate issues, though often linked. In simple terms, you are correct. If a director took out a BBL and used it for 'dividends' (or simple personal benefit) this would go to the DLA. In liquidation, this will be reported to the Insolvency Service, who will then decide if further action is warranted, e.g. a director's ban or prosecution.

The above scenario does not necessarily mean that there is still a DLA for the appointed liquidator to pursue. Since those transaction, a director may have repaid the sums, or left legal dividend in the company to repay.

I quite recently have had such a case - director took out a £30k BBL, used it to live off (not PAYE, company was not in a position to to issue dividends to shareholders) and by filed accounts for late 2022, an ODDLA of circa £35k was showing. Between then and this year, the director had taken out personal loans to support the company, and had repaid any DLA. In liquidation there will be no DLA to pursue, however the misuse of the BBL will be reported to the Insolvency Service.

 

[ChrisCallaghan]

I am speaking as an Accountant and would like an IP to give their take on this and how they would be dealing with it during a liquidation.

Added to the above - accounts prepared up to a recent date (not necessarily submitted) with a reconciled DLA are always incredibly helpful for advising on the financial impact on a director. Though we can advise on what actions the Insolvency Service may wish to investigate further, we cannot say what the outcome will be, though we can provide examples of recent action taken by the Insolvency Service based on their publications.

 

[Lisa Thomas]

My understanding is that initially, it was agreed the BBL could not be used for dividends, but then the Insolvency Services issued advice that it should be considered on a case by case basis to see if it was reasonable.

For example, if the Director's only income was from the company, and they were not entitled to furlough funds, and they drew their dividends at the same reasonable level and rate as they had previously done, then this should be considered reasonable.

But if they had always drawn dividends of say £2k per month pre covid, and then took out £45k in a lump sum the day after the BBL was received then that isn't reasonable.

 

[Elliot Green]

I thought (maybe wrongly) that it had been established years ago that the use of a BBL to pay Dividends would result in them being unlawful and in breach of the Companies Act 2006, the whole idea behind the BBL was to provide businesses with working capital to get through the pandemic.
To my mind if the Company has paid dividends when there has not been enough distributable profit then this would deem them unlawful, they then would surely become a Directors Loan and not a Dividend which should be repayable to the Company to cover its debts.
I am speaking as an Accountant and would like an IP to give their take on this and how they would be dealing with it during a liquidation.

It is an interesting point because of the
question of whether section 455 tax arises.

The complexity arises also from a dividend that is partly but not fully unlawful due to the level of reserves. The notion of a partially lawful dividend is odd because either the resolution is invalid or it isn't. But Re Marini highlights how directors can be relieved of the burden to repay the full amount of a partially unlawful dividend.

However on Liquidation a Liquidator who seeks to pursue the matter doesn't need to treat it as ODLA, they could simply ask for the unlawful dividend back based on the Companies Act liability. They could also ask for it back as a misfeasance claim (section 212) which has a lower Court fee.