The court has, in making a decision in a recent case, stopped an apparent attempt to find a loophole in the law regarding potentially illegal dividends.
Logic Alliance Limited and Logic Alliance International Limited went into insolvent liquidation in 2003. Their Liquidators took action against two of the companies’ directors, a Mr Taylor and a Mr Puresevic, for the return of dividends which the Liquidators believed to have been paid illegally, at a time when the companies were insolvent.
Mr Taylor and Mr Pursevic, who were the only shareholders in the company, argued that the ‘relevant accounts’ on which the question of the legality of the dividends should be based were those which were filed for the year to November 2000, which accounts showed the company to be solvent. They sought to argue that, in their position as shareholders, they could dispense with the laying of accounts before the shareholders in general meeting, and therefore the fact that another year end had passed was irrelevant, the 2000 accounts could be properly used for the purpose of ascertaining whether there were distributable reserves or not.
The court saw this as a potential abuse of the Companies Act, which if it decided in the directors’ favour, could expose creditors to significant losses where, say, following a good year, the directors simply ignored subsequent poor results and continued to extract high dividends, even though the company was insolvent.
The court, probably quite naturally, found in the Liquidators’ favour. The court distinguished the position in Re Duomatic Limited on the basis that while certain procedural aspects were not compulsory, the filing of accounts in accordance with the Companies Act was.