Directors’ Dividends & Loans – the court hands out another salutary lesson

by | Oct 27, 2020 | Advice to Directors, CVLs, Director Disqualification, Upsettable Transactions | 0 comments

In Mid October (2020) the court handed down another salutary lesson to directors of small companies who:

  1. Take a low salary and top up their pay package with dividends
  2. Fail to finalise / lodge their annual accounts and prepare all the necessary paperwork authorising those dividends
  3. Fail to keep proper books and records explaining their company’s transactions

In this case, the facts were:

  1. Sole director / shareholder at all the relevant times;
  2. Company was live and trading for 5 and a half years, only prepared one set of annual accounts
  3. HMRC wound the company up on the basis of a disputed debt, appointing their choice of liquidator
  4. No books and records were given to the liquidator, so he got all the banks statements and analysed the money the director had taken out personally or in cash over a 4 and a half year period.  This totalled £232k
  5. Director claimed much of the money was taken as dividends, a smaller sum as normal (and perfectly plausible) trading expenses.
  6. Liquidator went to court saying that if the director could not explain the withdrawals, or if the withdrawals were for dividends, then the money should all be repaid.
  7. Why?  Because (a) In the absence of proper approval / formal declaration of the dividends by reference to ‘relevant accounts’, any money paid that way was a loan to the director which should be repaid; and / or (b) it was a breach of the director’s fiduciary duty to cause the company to allow a director’s loan of that sum; and/or (c) Where a liquidator shows a director received a payment from a company, the burden of proof then shifts on to that director for him / her to explain the transaction.
  8. There was no suggestion that the director was crooked or had not given proper evidence to the court.  He’d just neglected the company’s accounts and tax affairs.

The Outcome

  1.   The court ordered the director to repay £193k to the liquidator

The Learnings

  1. Prepare, and retain, complete and proper books and records explaining the company’s transactions.
  2. Finalise your accounts on time, declaring dividends properly at the time – that way you should be able to ‘box off’ the dividends paid out of retained profits.
  3. Don’t neglect your company’s accounting or tax affairs.
  4. Your accountants’ support is vital in protecting you from such an attack.
  5. Liquidators will be looking at dividends paid after your last set of accounts / declaration of dividends, creating an overdrawn director’s loan account which they will pursue you for if you do as this man did here.

Here’s a link to the decision.