Retrospective Dividend Payment: When and at what cost?
It’s not uncommon for dividends to be backdated by the directors, but is it lawful? The simple answer is: it depends. If a dividend is backdated, for instance, to get around increases in tax charges, HMRC is likely to discover and overturn it – and the company could be fined (on top of an additional tax charge).
A backdated dividend is also unlawful if made when a company is insolvent. Under section 829 Companies Act 2006, a purported distribution of assets by way of dividend to its members is unlawful if made on the winding up of the company.
A recent ruling has provided some useful clarity on the circumstances in which a backdated dividend was permitted – and identifying the ‘actual’ date on which it is made.
It’s a date
The directors of a small company were a married couple and the only shareholders in a design and manufacturing company. They ran the company from its incorporation in 2013, until it went into liquidation on 1 November 2017. The claimants were the assignees of the liquidator’s claims against the directors.
These proceedings included a claim in respect of a £560,000 dividend set off against sums outstanding on the directors’ loan accounts (DLA). The dividend was recorded on the company’s accounting platform, Sage, in April 2017 by the accountant; but the directors had talked about declaring the dividend with the company accountant back in July 2016 when discussing the draft 2014-2015 accounts.
At issue for the court was at what date did the dividend amount to a ‘distribution' under s829? This was crucial because its timing determined its lawfulness - and the shareholders’ ability to ratify any decision made by the directors in breach of duty in order to preclude a claim against the directors.
The court found that on the evidence, the distribution of the dividend was made – retrospectively - in July 2016 and not in April 2017 when recorded in Sage. It was accepted that the accountant recorded it at that point to correct and reconcile the accounts. The directors had not asked him to actually make the distribution in April 2017.
The court also stated that under s829, a distribution “must be a positive action not only affecting a company's finances in some definite way, but also changing the legal position and tax liability of its shareholders”. Here, the directors decided in July 2016 to declare themselves a dividend and ‘pay' it immediately into their DLA to reduce it, both of which were recorded in the 2014-15 accounts: declaring the dividend and reducing the 'other debtors' figure.
The distribution was therefore lawful.
Practical impact
This decision illustrates the potential risks of making retrospective dividends. On a practical note, it also highlights how problems can arise where the directors fail to make clear decisions as to the intended effective date of dividend distributions; and fail to ensure accurate accounting entries and statutory accounts are maintained.
Disputes relating to dividends, particularly if the company later goes into administration, could prove costly.
1Manolete Partners plc v Rutter and Rutter [2022] EWHC 2552
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