The Facts

The Claimant purchased various rights to action from the Liquidator of a Company. The Deed of Assignment included the right to bring a claim for "alleged illegal dividends and/or transactions at an undervalue" arising out of payments to the Defendant, a director/shareholder, had received. It is important to note that the Deed of Assignment did not grant the right to bring a claim for Preference.

The Company was an engineering business run by the Defendant and one other, which had fallen on hard times during the recession. The Company made layoffs, reduced the directors' salaries and increased their working hours.

The Company had, on the advice of its accountant, paid the Defendant a monthly combination of dividends and salary for the purposes of 'tax efficiency'. The accountant's role was to assess whether sufficient distributable reserves existed for the payment of dividends.

The Company was, however, unable to save itself and entered Creditors' Voluntary Liquidation in November 2015. In the 18 months prior to its Liquidation, the Defendant received £23,511 in dividend payments. The claimant sought an order that the payments were:

  1. Unlawful dividends in breach of s830 Companies Act 2006 ("CA"), on the grounds that the Company did not have sufficient distributable reserves to make dividend payments
  2. Misfeasance, on the grounds that such payments were a breach of duty
  3. A Transaction at Undervalue, on the grounds the Company did not receive sufficient consideration for the payments
  4. A Preference, because the Defendant had preferred himself over other creditors.

The Judgment

In a somewhat frustrating - though not unpredictable - decision for the Claimant Assignee, all four claims were dismissed.

The Judge held, with regard to the unlawful dividends argument, that the Company's Articles (which were the Model ones) did not allow for it, in the circumstances, to declare dividends. As such, for the purposes of the claim, the relevant sections of the CA did not apply because the payments "whatever their nature", could not be dividends.

The misfeasance claim was dismissed on the basis that the Defendant had acted solely on the advice of his accountant. Similarly, the Transaction at Undervalue claim failed on the basis that the payment the Defendant received was for the work he had undertaken was proportionate and fair.

The Preference claim might have succeeded, were it not for the fact that the Deed of Assignment did not specifically assign that right of action. The Judge did not discuss its merits, and only found that the right to this cause of action did not vest in the Claimant Assignee.

Our Comment

The case will prove helpful in assessing the merits of claims for unlawful dividends. This is a technical and often complex area of law with which insolvency professionals may be unfamiliar compared to other rights of action. A careful and forensic analysis of both the Company's accounts and their relevant articles will be necessary in making such claims.

As for the misfeasance and Transaction at Undervalue claims, the facts implied that these would be unlikely to succeed and confirmed relatively established principles.

Perhaps the most important lesson of this case, however, is for litigation funders. When purchasing claims, ensure the Deed of Assignment is drafted carefully!