The High Court recently considered the interpretation of S270(3) of the Companies Act 1985. Under S263 of the 1985 Act, it is not permitted for a company to pay a dividend to shareholders except out of profits available for distribution. S270(3) provides that the relevant accounts for establishing whether a company has sufficient distributable reserves for the payment of dividends are its last annual accounts which were laid in respect of the last preceding accounting period.
In a recent case a company, L, had net assets showing in its accounts for the year ending 30 November 2000 but went into liquidation in November 2003. The joint directors and shareholders of L paid themselves dividends rather than a salary from 30 November 2000 until L went into liquidation. An application was made by the liquidators arguing that certain dividends were unlawful due to non-compliance with the formalities of the 1985 Act.
The joint directors and shareholders of L claimed that in determining whether the dividends were lawful, the "relevant accounts" under S270(3) would be for the accounting reference period when the last compliant accounts were laid before the company in general meeting. L's last compliant accounts were its 2000 accounts in terms of which the distributions made did not exceed the distributable reserves. They also argued that L's subsequent accounts for the year ending November 2001 were not "relevant accounts" because they had not been approved by the board until July 2003 or laid before the company in general meeting. The Court considered this interpretation was unlikely to reflect parliament's intention because it might encourage directors to delay preparation of compliant accounts and extract the assets of a failing company while denying creditors their statutory protections.
It should be noted that this question has not yet been finalised by the court but the court considers the liquidators to have a realistic prospect of success at trail.