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Dividend or Loan? - Director liable to return sums in liquidation.

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Oliver Hebdon

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by

Oliver Hebdon

Corporate and Commercial

Dividend or Loan? – Director liable to return sums in liquidation.

 

A recent High Court ruling has emphasised the importance of maintaining accurate financial records and preparing contemporaneous documentation to explain a company’s financial dealings.

 

After BM Electrical Solutions Limited ran into financial difficulties, a winding up petition was presented by HMRC which led to the company being wound up on 3 August 2015.

 

The company had only filed one set of accounts for the period ending 31 January 2012, but the liquidator reviewed bank statements for the period after 31 January 2012 which showed that bank transfers in the sum of £221,034.94 had been made to Mr Belcher (who was the company’s sole director after 11 April 2013).

 

Mr Belcher attempted to justify these bank transfers as remuneration and suggested that they should be treated as salary and/ or dividends of around £70,000 per annum. However, there was no evidence of a resolution that he should receive remuneration at this level, nor that the company actually declared dividends in his favour. A credit of £40,957 was given in respect of the net salary that Mr Belcher was entitled to until liquidation and Mr Belcher asserted that the balance of £180,077.94 was ascribed to the ‘dividend’ code in the accounts software package.

 

However, the court held that the sums should be treated as loans to Mr Belcher, in the expectation that there would be sufficient profits each year to clear them off. Mr Belcher did not take any steps to have accounts drawn up after 31 January 2012 and so did not receive input as to whether these sums could be cleared off at year end by declaring a formal dividend.

 

The court made it clear that the sums could well have been cleared off and there could have been a formal declaration of a dividend which complied with the Companies Act – but there wasn’t. If a formal dividend had been properly declared the court indicated that the payments would not have been subject to challenge by the liquidator. Instead, as it was, Mr Belcher was required to repay a total of £193,029.97 less £4,215.00, being the credit as at 31 January 2012. As part of that total, Mr Belcher was also required to repay payments in the sum of £12,952.03 made to Bet365, Sky Bet and Leeds United (as these represented payments which were not made in good faith for the company’s purposes).

 

The case serves to highlight the importance of not only maintaining proper accounts and records but also in having all appropriate company documentation drawn up at the relevant time in order to be able to illustrate the treatment of payments made by a company.

 

Where a director cannot point to a dividend actually having been declared it appears that it may not be open to that party to say (retrospectively) that payments received should be treated as having been declared as dividends. Even where it can be demonstrated that a payment should be treated as a dividend, a party would still have to show that any such dividend was lawfully declared.

 

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