Interim Accounts and Profits Distribution
Can a company rely on interim company accounts purportedly across different documents to justify a profit distribution? A recent ruling1 provides businesses with useful clarification on interim accounts and approving a distribution within the law.
What’s the background?
A company made a distribution of its profits based on its interim accounts. The company later went into liquidation but it was common ground in subsequent proceedings that at the time of the distribution, the company was solvent.
The company liquidator argued that the interim accounts were not valid, therefore the individuals who received the distribution should compensate the company. The liquidator relied on the arguments that the interim accounts were not set out in a single document setting out all relevant matters, and the directors had also failed to determine the actual amount of profits available.
There were also errors in the interim accounts, according to the liquidator – and they not been presented to a properly convened meeting of either the directors or the shareholders of the company.
What did the court decide?
The High Court rejected each of the liquidator’s contentions. Interim accounts do not have to be set out in a single document and can even be spread across several documents.
Nor do the directors have to determine the actual amount of profits available for distribution. Company law permits them to exercise a reasonable judgement based on the interim accounts as to whether there are generally sufficient distributable reserves to cover the proposed distribution.
Did the alleged errors render the interim accounts invalid? The court said no – they can still qualify even if they contain errors. Zacaroli J said in his ruling: “This case does not turn, in my view, on the precise formulation of the test for Interim Accounts. While, as I have noted above, the formal requirements relating to the accounts of public companies, including that they be properly prepared so as to give a true and fair view, do not apply to interim accounts for private companies, it must nevertheless be a relevant factor, when asking whether the accounts do enable a reasonable judgment to be made, to consider whether they do give a true and fair view of, for example, the profit and loss for the company for the period in question.”
The court also said interim accounts did not have to be laid before a properly convened board meeting or a meeting of the members of the company to be valid. There was no such legal requirement – the law merely required that they must be “accounts relating to the company”. This contrasts with the requirements relating to annual accounts, which must have been "laid" in respect of the last preceding accounting reference period.
Also, each of the directors knew of and approved the distribution and they had reached a determination within their legal powers.
What does this mean?
Directors need to tread carefully when exercising their functions and fulfilling their duties when considering making a distribution and approving a distribution.
While the liquidator’s claims failed in this case, the ruling should serve as a timely reminder that the relevant company law must be adhered to – and directors should ensure they record the steps they make and the reasons for which they make decisions so they can defend subsequent proceedings should a dispute later arise.
1Burnden Holdings (UK) Ltd v Fielding & Anor [2019] EWHC 1566
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