Liquidator is asking to repay dividend

[Maniek123]

Im looking for advice on liquidation process.
Liquidator is asking to repay dividends from 2 year period for total of 67k.
While taking the dividends balance sheet was negative, had about 9k debt to hmrc.
At that time I wasnt aware this is considered as illegal dividend. Each time the divident was taken there was still enough in the bank to cover the hmrc debt..
Could i argue that the divident was taken in good faith?
What are my options now?
What will happen to the tax I paid on dividens?
I ask the liquidator for advice but they said they cant advice and ask me to propose the sum I can repay if I cant afford the 67k.
Would appreciate any input on the situation

 

[ChrisCallaghan]

Hi @Maniek123 ,

Could i argue that the divident was taken in good faith?

Unfortunately not. As you've mentioned in your post, you've not done anything malicious or intentionally wrong, but the reality is that you've taken dividends beyond what you were entitled to take based on your company's profitability. There is no judgement from me here, but I'm afraid ignorance of your company's financial circumstances or your fiduciary duties as a director is  not a defense.

What are my options now?

In short, negotiate with the appointed liquidator.

They have come to a sum (£67k I assume) that you owe back to your company in liquidation. You could attempt to reconstitute your accounts to lessen this amount, but assuming the claimed amount is correct, then its time to discuss practical repayment options (i.e. lump settlement offers, monthly repayment plans etc).

What will happen to the tax I paid on dividens?

Well.... if the a liquidator is pursuing you for illegal dividends... then this amount is not taxed as dividends... it's taxed as income. I suggest seeking tax advice.

From my perspective as a corporate insolvency advisor, I'm sorry that all of this is happening to you post liquidation. In an ideal world, this issue would've been flagged before you committed to a liquidation. I cannot help you directly, but please feel free to contact me if you'd like to chat about what you're facing.

 

[Frank Wessely]

Hi @Maniek123

There is a significant amount of further information needed to establish whether or not you can dispute the liquidator’s claims. Your company is in insolvent liquidation but I assume that there are other liabilities apart from the £9k due to HMRC, which surely did not remain static during the 2 year period in question.

The company’s nature of trade is relevant and how profits were recognised and reflected in internal management accounts.

As previously suggested, you should obtain separate advice.

Thanks.

 

[fisicx]

@Maniek123 - were you a director or just a shareholder?

 

[UKSBD]

This is something I've wondered before.

What is the important date of a corporation tax bill, or are you supposed to work it out on a rolling basis?

rough example
If year-end is February - £100K profit

Corporation tax due December, is the important date of the debt, February, December or there is no exact date and you have to allow for it on a rolling basis?

 

[Lisa Thomas]

This might be easier to chat through over the phone, because if the company was only insolvent to the tune of c£9k, I don't understand where the figure of £67k has come from. We need more information here.

Good faith doesn't apply to unlawful dividends I'm afraid. If you took too much out of the company then you are liable to pay it back, assuming you can afford it.

Have you declared the dividends to HMRC and paid tax on them?

 

[Maniek123]

Thanks for the replies
Yes, I was a director for the business.
I mentioned the negative sheet balance of about 9k while the 2 dividends were paid out. When the business went into liquidation the total debt was about 43k.
Mainly hmrc for vat, corporation tax but also about 10k from bounce back loan.
The business was trading as builder, mainly kitchen ,bathrooms and small flat renovations.
The dividends have been declared and i have paid tax on them- as personal income.

 

[JEREMY HAWKE]

If the OP took this cash as salary and paid themselves though the PAYE and paid income tax without claiming dividends They would not be liable to repay this sum

Worth noting Maybe trying to save on tax is not the best route where the company is on rocky ground

 

[UK Contractor Accountant]

f the OP took this cash as salary and paid themselves though the PAYE and paid income tax without claiming dividends They would not be liable to repay this sum

Depends sometimes if they paid the PAYE over to HMRC or let the debt build up !!!

 

[Elliot Green]

Im looking for advice on liquidation process.
Liquidator is asking to repay dividends from 2 year period for total of 67k.
While taking the dividends balance sheet was negative, had about 9k debt to hmrc.
At that time I wasnt aware this is considered as illegal dividend. Each time the divident was taken there was still enough in the bank to cover the hmrc debt..
Could i argue that the divident was taken in good faith?
What are my options now?
What will happen to the tax I paid on dividens?
I ask the liquidator for advice but they said they cant advice and ask me to propose the sum I can repay if I cant afford the 67k.
Would appreciate any input on the situation

There are a lot of unknowns here. Taking dividends is a rather technical area and although there can be some debate as to whether or not they are treated as a matter of strict liability, generally a director is taken to know the facts, even if they do not know the law. So a good faith argument *might* be an uphill struggle. Matters can only be put in the most general terms.

Money in the bank is not typically the same thing as 'distributable reserves', which is needed for a dividend.

To draw a dividend, there are usually a number of essential ingredients needed to stir into the pot:

1. Were they drawn with reference to historic 'relevant accounts' that showed a true and fair view?
2. Did those 'relevant accounts' have sufficient distributable reserves in each period to enable the hoovering up of each of the dividends in the 2 years totalling £67k.
3. Were the dividends formally 'declared' in accordance with the Articles?
4. Were there any distributable reserves available for any of the £67k claimed?

It is *possible* a case like Re Marini Ltd v Dickenson) [2003] EWHC 334 *might* warrant consideration. In that case what lawfully could have been taken as a dividend provided some relief to a director even though the dividend itself might not have been lawful. The point is, there can be a difference between what is technically an unlawful dividend and the relief that a Court will afford the liquidator. The two are not necessarily the same.

There are other matters to take into account, such as for example only, how the case of the liquidator has been pleaded. Is it pleaded as a misfeasance claim, an unlawful dividend claim or a combination of the two?

Please take note of the disclaimer in my sign off area. No liability is accepted for reliance on this post. No reliance upon it should be placed. This is for information purposes only.

I would urge you to consider speaking to an experienced insolvency professional adviser if you consider you have a case to dispute matters whilst fleshing out all the pertinent facts of your case for such a person to consider in detail.

All the best.

 

[Elliot Green]

If the OP took this cash as salary and paid themselves though the PAYE and paid income tax without claiming dividends They would not be liable to repay this sum

Worth noting Maybe trying to save on tax is not the best route where the company is on rocky ground

Often taking a salary authorised by an ordinary resolution of the company (with a written employment contract) and paying the required bit of PAYE/NIC as you go along *can* be a safer way to navigate due to the mandatory characteristics of dividends.

 

[WaveJumper]

There are a lot of unknowns here. Taking dividends is a rather technical area and although there can be some debate as to whether or not they are treated as a matter of strict liability, generally a director is taken to know the facts, even if they do not know the law. So a good faith argument *might* be an uphill struggle. Matters can only be put in the most general terms.

Money in the bank is not typically the same thing as 'distributable reserves', which is needed for a dividend.

To draw a dividend, there are usually a number of essential ingredients needed to stir into the pot:

1. Were they drawn with reference to historic 'relevant accounts' that showed a true and fair view?
2. Did those 'relevant accounts' have sufficient distributable reserves in each period to enable the hoovering up of each of the dividends in the 2 years totalling £67k.
3. Were the dividends formally 'declared' in accordance with the Articles?
4. Were there any distributable reserves available for any of the £67k claimed?

It is *possible* a case like Re Marini Ltd v Dickenson) [2003] EWHC 334 *might* warrant consideration. In that case what lawfully could have been taken as a dividend provided some relief to a director even though the dividend itself might not have been lawful. The point is, there can be a difference between what is technically an unlawful dividend and the relief that a Court will afford the liquidator. The two are not necessarily the same.

There are other matters to take into account, such as for example only, how the case of the liquidator has been pleaded. Is it pleaded as a misfeasance claim, an unlawful dividend claim or a combination of the two?

Please take note of the disclaimer in my sign off area. No liability is accepted for reliance on this post. No reliance upon it should be placed. This is for information purposes only.

I would urge you to consider speaking to an experienced insolvency professional adviser if you consider you have a case to dispute matters whilst fleshing out all the pertinent facts of your case for such a person to consider in detail.

All the best.

And maybe I would add burying ones head in the sand as a director cannot be an excuse, recognising your business is in trouble and no longer a going concern must be a directors responsibility at the end of the day. As mentioned we don't know all the facts but surely a company either has money for salary // dividends or not in which case racking up even more debt is just adding to your problems and rather foolish in my book