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The court has found merit in the submissions of a company’s liquidators on two important points regarding the payment of dividends. Firstly, the court thought it arguable that a company may only lawfully decide to pay a dividend by referring to its last annual accounts, provided those accounts: » were properly prepared; » referred to the last preceeding accounting reference period; and » had been laid before the shareholders. The defendant’s argument that the last annual accounts are the last accounts which were actually prepared and laid before the shareholders failed. This means that a company with an accounting reference date of 30 November could not lawfully decide in December 2001 to pay a dividend on the basis of accounts drawn up to 30 November 2000; it would have to prepare its accounts to 30 November 2001 first. Secondly, the court thought it arguable that the accounts would have to actually be laid before the shareholders in accordance with the statutory provisions; the informal consent of all of the shareholders under the Duomatic principle may be insufficient. The case concerned a company which was persistently late in preparing and filing its accounts. It was profitable according to its last prepared accounts (to 30 November 2000), but then lost a key customer and employee, resulting in it becoming insolvent and eventually going into liquidation in November 2003. The director/shareholders had declared and paid themselves dividends from February 2002 to October 2003 amounting to £249,000 which the company’s liquidators were seeking to recover. Comment: The judgment is understandable on the facts of this case: an insolvent company seeking to evade the statutory safeguards surrounding the payment of dividends by relying upon its financial results in one profitable year. However, it imposes a significant restriction on the ability of a company to declare a dividend immediately after its year end. It is not clear whether interim dividends by the directors would be permitted either; the facts and judgment do not distinguish between these and dividends declared by the shareholders. It should be noted that the judgment related to an interim application and so a different decision may be reached at the full hearing. For example, in the alternative, the liquidators argued that the dividends were prohibited on the basis that the directors had a residual duty not to make a distribution when the company had no distributable reserves and was insolvent (see ¶1641). A company may only pay a dividend if it has sufficient distributable profits by reference to its “relevant accounts”. These are the last annual accounts that were prepared and laid before the shareholders in respect of the last preceeding accounting reference period (s 270(3) CA 1985). There are statutory provisions as to what should happen if those accounts do not show sufficient profits, but not if they do and the company’s financial position has subsequently declined. Under the Duomatic principle, the consent of all of the shareholders entitled to attend and vote at a shareholders’ meeting is as binding as a resolution at that meeting, even if the formalities of a shareholders’ meeting have not been observed (¶3590+). |
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Interpretation of “relevant accounts” for purposes of dividend payment See CLM: ¶1620+ |
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Re Logic Alliance Ltd; Re Logic Alliance International Ltd Case No 25C of 2006 (Ch Bristol) Thank you to Guildhall Chambers for a copy of this judgment |
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