Gardner Leader

Reclaiming Dividends

When a company is liquidated, unsecured creditors are often left with nothing after fees and secured creditors are paid. Chris Felton, Dispute Resolution Partner at Gardner Leader Solicitors in Newbury, explains how dividends paid to directors of an insolvent company can be recovered.

I am a shareholder and MD of a retail company. I have had a long trading history with ‘A Ltd’, which has supplied my company for years. ‘A’ has just gone into liquidation and we are a major creditor, having paid over £1m for advance orders. 

Does ‘A’ have any assets?

Yes but it seems that all the assets will be realised to satisfy fees and secured creditors. This seems unfair because I know the director/shareholders of ‘A’, and am aware that over the last few years they have paid themselves handsomely by way of dividends. 

You’d best notify the liquidator about this as it may be possible for them to bring an action to recover dividends paid to ‘As’ directors, especially if they were also the only shareholders. The liquidator will usually be aware that this has happened.

On what basis could I bring an action?

If the liquidator can show that the dividends were paid at a time when ‘A’ was insolvent then this would generally be enough to persuade the court that they should be reclaimed by the company and therefore available to the creditors

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That should be easy enough to prove?

Not necessarily. There is recent case law dealing with what information company officers are entitled to base their decision on in declaring a dividend in the first place. Section 270 of the Companies Act 1985 (“CA”) requires that companies determine the question of whether a distribution can be made, and its amount, by reference to the 'relevant items' in the 'relevant accounts'. The 'relevant items' are the profits, losses, assets, liabilities, provisions, share capital and reserves. The 'relevant accounts' will be the company's latest 'annual accounts' laid before the company in general meeting.

 
What if the accounts are out-of-date or don’t reflect the viability of the business?

In one case the director/shareholders argued that their decision to declare a dividend was based upon the last filed accounts which showed the companies to be solvent. Despite another accounting period having passed (which would have shown a downturn), they argued that the last filed accounts were the ‘relevant accounts’ for the purposes of section 270(3) CA, i.e. the relevant accounts upon which to base the decision to declare dividends.
The court held that had the director/shareholders’ interpretation of the Companies Act been correct, it would allow directors, following a prosperous year, to disregard company performance in subsequent years and give them the ability to remove assets, whilst the company was insolvent, via dividends thus depriving creditors. The court found that the directors’ interpretation of that provision was wrong, and as a result the liquidators were entitled to reclaim the dividends

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So what should I do?

Notify the liquidator of your concerns. It is likely that if the sums involved are significant, they will want to take action in order to achieve a better realisation of the company’s assets.

Details: Chris Felton
Gardner Leader Solicitors
Tel.: 01635 508080

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