Unlawful dividend: which shareholders must repay (CA 2006 ss.830, 847)
Saoirse and Theo each hold 50% of the shares in Kestrel Bakeries Ltd, a private company limited by shares with unamended model articles. Saoirse is the managing director and prepared the company's annual accounts herself. Theo is a passive investor who is not a director and sees only the accounts. On the directors' recommendation, the members declared a final dividend of £50,000 based on those accounts, and each received £25,000. It later emerges that Saoirse knowingly left out a large write-down of obsolete stock. Properly prepared, the accounts would have shown accumulated realised losses and no distributable profits. Theo had no reason to suspect anything was wrong.
Which shareholder, if any, is liable under the Companies Act 2006 to repay the dividend received?
Choose one answer to see the reasoning.
Worked answer
Correct answer B: Saoirse only, because she knew or had reasonable grounds to believe the distribution was unlawful, and Theo did not.
THE RULE TO REMEMBER
Distributions may only be made out of distributable profits; a member who knew or had reasonable grounds to believe a distribution was unlawful must repay it (CA 2006 ss.830, 847).
Unlawful dividend: which shareholders must repay (CA 2006 ss.830, 847)
A company may make a distribution only out of profits available for the purpose (s.830(1) CA 2006). These are its accumulated, realised profits less its accumulated, realised losses (s.830(2)). Properly prepared accounts would have shown no distributable profits, so the £50,000 dividend contravened Part 23. Section 847 makes a member liable to repay a distribution made in contravention of Part 23 if, at the time, the member knew or had reasonable grounds for believing that it was so made. Saoirse prepared the accounts and knowingly omitted the stock write-down, so she must repay her £25,000. Theo was a passive investor who relied on the accounts and had no reason to suspect a problem, so he is not liable under s.847. Separately, Saoirse may also be liable as a director for breach of duty in recommending an unlawful dividend.
Why A is wrong: Section 847(2) imposes liability only where the member knew or had reasonable grounds to believe that the distribution contravened Part 23.
Why C is wrong: A members' resolution cannot make lawful a distribution that is not covered by available profits under s.830.
Why D is wrong: Section 847 expressly makes a shareholder who received an unlawful distribution with knowledge liable to repay it.
Why E is wrong: The test is distributable profits under s.830, not share capital, and the liability under s.847 covers the whole unlawful distribution.
A little more practice done.
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