Executive summary

  1. the High Court, approving the recent UK Supreme Court ruling in Progress Property Company Ltd v. Moorgarth Group Ltd1, confirmed that in considering what might amount to an unlawful return of capital, what is critical is the substance of the transaction, and not what the parties choose to call it;
  2. it is an unlawful circumvention of Section 45 of the Companies (Amendment) Act 1983 Act to attempt, in a company's articles of association, to convert a dividend entitlement in respect of a class of shares into a debt due and owing by the company to a member holding the shares in question, if there are insufficient realised profits to pay the dividends due; and
  3. an "entire agreement" clause in an agreement such as a subscription agreement must be very widely drafted to be effective to close off collateral contracts formed between the parties which are extraneous to the subject matter of the agreement containing the "entire agreement" clause.


The plaintiff companies operated a farmers' co-operative in Co. Cork. The defendant company was incorporated in 2001 to finance, construct and operate a wind farm at Muingnaminnane, Co. Kerry. The defendant company was wholly owned by three individuals who were the promoters of the company and who owned the lands near Tralee where the wind farm is sited.

In this case the plaintiffs claimed that they were owed the sum of €504,000 by the defendant company, pursuant to an investment agreement between the parties.

The investment came about in 2007. Initially, the intention was that the plaintiffs would provide mezzanine financing of €1.2 million to the defendant for five years at a fixed annual return of 9 % to enable the defendant to invest in the Muingnaminnane Windfarm. The total cost of the project was circa €20 million, with €18,628,000 provided by a loan from Ulster Bank and further funds by means of a BES investment of €1 million provided by other investors.

The plaintiffs wanted to benefit from tax relief available for an investment in renewable energy under Section 486B of the Taxes Consolidation Act 1997. However, this required a re-structuring of the investment, as a result of which the plaintiffs made an equity investment in the defendant’s company, as opposed to the mezzanine financing that had originally been proposed. The restructured arrangement took the form of a share subscription of €1.2 million under Section 486B, which was intended to provide a dividend return to the plaintiffs of approximately 9% per annum. The plaintiffs subscribed for a number of "B" shares in the defendant company.

The plaintiffs were anxious to protect their position in the event that the defendant company failed to make profits out of which the annual dividends could be paid. This led to the insertion by the parties' legal advisors of an amendment to Article 2(B)(ii) of the defendant’s Articles of Association to read:

"“B" Shares: The holders of "B" Shares shall be entitled to be paid on a cumulative dividend at the rate of 9% per annum on the amount paid on the "B" Shares held by them respectively including any premium thereon. The holders of "B" Shares may be entitled to a further dividend payment representing 0.01% of distributable profits provided the Company in General Meeting so resolves. In the event that a dividend is not paid in any one year whether declared or not it shall become a debt due and payable by the company to the holders of the "B" Shares.” (Emphasis added)

This highlighted sentence was inserted to take into account a situation in which the defendant company failed to generate profits which would permit the declaration or payment of a dividend.

Basis of claims

The investment went ahead in 2007 but shortly after this, it became clear that the defendant was unable to advance the restructuring plan to allow the plaintiffs to avail of the tax relief. It was decided to maintain the arrangements with the plaintiff companies and instead it was agreed that the annual dividend would be increased from 9% to 10.5% to compensate the plaintiff companies as they could no longer avail of Section 486B relief.

A dividend was declared and distributed in the years 2008 and 2009 to the plaintiffs but none was declared or distributed in the years 2010, 2011, or 2012. This led to the claim for €504,000 by the plaintiffs for arrears of dividend for those three years as a debt payable and due.

The defendant claimed that there were no profits out of which a dividend could be declared for those years and that the payments could not lawfully be made as the defendant in the relevant periods had no distributable profits within the meaning of Section 45 (2) of the Companies (Amendment) Act 1983.

Section 45 Companies (Amendment) Act 1983

Section 45 subsections (1) and (2) of the Companies (Amendment) Act 1983 provide as follows:-

“(1) A company shall not make a distribution (as defined by section 51) except out of profits available for the purpose.

(2) For the purposes of this Part, but subject to section 47 (1), a company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.”

Rent issue / "entire agreement" clause

The plaintiffs claimed that the annual sum for rent should not have been factored into the figures for profits and, as a result of an agreement entered into by the parties, should not have been paid unless there were sufficient profits which would permit the payment to the plaintiffs of their annual sum after payment of rent. The basis for their claim was an email dated 31 August 2007 from one of the defendant company's directors to the plaintiffs’ accountant to that effect. Had rent not been withdrawn from the defendant companies’ accounts, the plaintiffs alleged there would have been adequate reserves out of which to pay them.

However the defendant argued that this agreement was superseded by the subsequent subscription agreement which was expressed, at clause 5.9, to be the “entire contract” between the parties, thereby negativing the earlier email and any agreement to which it may have related. Clause 5.9 provided that the agreement and the schedules thereto embodied the "entire agreement and understanding between the parties" and superseded all prior statements, representations, agreements and understandings relating to the transaction in question.

The plaintiff argued that the parties had entered a “special contract” whereby the defendants undertook to discharge the annual sum as a debt in a situation where no profits existed, enabling a distribution to be made to the plaintiffs as members. The plaintiffs invited the Court to look at the substance of the agreement between the parties. They said that this was never a true share purchase equity investment, but rather a loan in respect of which a special provision so acknowledging had been inserted at clause 2(B) (ii) of the Articles of Association. This, they said, established a bespoke “special contract” which met the plaintiffs' specific needs.

Summary of defendants' submissions 

  • The defendant claimed that there were no profits out of which a dividend could be declared for the years 2010, 2011 and 2012 and that the payments could not lawfully be made as the defendant had no distributable profits during those years within the meaning of Section 45 (2) of the Companies (Amendment) Act 1983. They went on to claim that a dividend may only be made out of distributable profits and that their audited accounts reveal no distributable funds for any of the years 2009, 2010, 2011 or 2012. In those circumstances, they claimed, the operation of Section 45 (1) could only mean that no dividend could lawfully have been declared or paid. 
  • They claimed that that their Articles of Association and Section 45(1) of the Companies Act must be construed without regard to the subjective intention of the parties at the time the relevant Article was being drafted and that:
    • as there was no “dividend” as contemplated by Article 2(B)(ii) of the defendant’s Articles of Association, nothing that could become a debt due and payable to the holders of "B" Shares; or alternatively
    • Article 2(B)(ii) of the defendant’s Articles of Association did not place the plaintiffs in the position of a creditor of the company, but rather they remained at all times a member of the defendant company as shareholders and all sums remain “distributions” that were subject to the restrictions laid down by Section 45(1) of the Companies (Amendment) Act 1983; or alternatively;
    • if Article 2(B)(ii) purported to place the plaintiffs in the position of a creditor of the company with respect to any unpaid dividend, then that agreement was illegal and/or void as a matter of law and public policy and was consequently unenforceable as against the defendant. The defendants stated that they were reclaiming the payments made by them to the plaintiff companies for the years 2008 and 2009 on this basis; and
    • In relation to the exclusion of rent from the defendant’s reserves, they argued that the email of 31 August, 2007 was superseded by the Share Subscription Agreement and specifically by clause 5.9 which provided that the agreement embodied the “entire agreement and understanding between the parties” and superseded all prior statements, representations, agreements and understandings relating to the transaction in question.

Summary of Plaintiffs' submissions 

  • The plaintiffs claimed that the Court should look to the substance of what was intended by the parties in this case;
  • The claimed that the funds were due to the plaintiffs not by virtue of the fact that they were shareholders in the defendant, but rather as a lender for a fixed annual return. It was clear from the evidence that it was always the plaintiffs’ intention and requirement that they be paid a fixed payment every year and without that assurance the investment would not have been made The distribution provided for in the Articles was not one being made to the plaintiffs as members, but rather was being made to them as creditors of the company;
  • They said that Section 45 had no application by reason of the express wording of Article 2(B) (ii) of the Articles of Association and that by agreement of both parties and with the benefit of legal advice, the relevant article was amended so as to ensure the plaintiffs would receive a fixed return on the finance provided to the defendant irrespective of whether or not the defendants declared a dividend or had profits available to make that distribution. It was obvious in this case that had the defendant not agreed to amend the Articles of Association the monies would not have been advanced to the defendant; 
  • They further argued that the defendants were not legally permitted to deduct rent from the capital reserves of the company. The email of 31 August, 2007 underpinned that; and
  • They contended that the Share Subscription Agreement with its “entire agreement” clause referred only to the plaintiffs’ subscription to shares in the defendant company, and did not refer to the collateral agreement with regard to rent. The fact that the confirmation was expressly sought and given by the defendant on 31 August, 2007, induced the plaintiffs into entering the Share Subscription Agreement and could only in the circumstances be construed as a collateral contract. If the defendant had not made the rental payments, the defendant would have had sufficient reserves to make the distribution.


Finding in favour of the plaintiffs, Kearns P held as follows:

  • The payments made by the defendant to the plaintiffs, calculated as a dividend, were prima facie distributions, since the plaintiffs were shareholders of the defendant;
  • He approved the decision of the English Supreme Court in Progress Property Company Ltd. v. Moorgarth Group & Others, holding that a payment paid out of capital (and not out of distributable profits) which, on analysis, is found to be a dividend, is unlawful. He quoted the Supreme Court in that case where it said that “whether or not the transaction is a distribution to shareholders does not depend exclusively on what the parties choose to call it. The court looks at the substance rather than the outward appearance”; 
  • He dismissed the plaintiff's claim that the transaction constituted a “special contract” which operated to circumvent the application of Section 45 of the Companies (Amendment) Act 1983;
  • However, he went on to say that he was satisfied that a collateral contract was made between the parties in which the promoters represented to the plaintiffs that rent payments would be subordinated to dividends payable to the plaintiffs under the share subscription agreement. In so doing, the judge accepted that the email in question amounted to a contract between the parties and, in turn, formed part of a collateral agreement2;
  • The plaintiffs would never have entered the agreement but for the representation and undertaking regarding the rent; and
  • Clause 5.9 of the share subscription agreement related to everything contained in the share subscription agreement, but not to matters altogether outside of it, as the representation concerning the rent clearly was.


This case highlights the importance of careful drafting of so called "boiler plate" clauses such as entire agreement clauses in agreements. In this case, the clause in the share subscription agreement did not cover an agreement outside of the strict scope of the agreement. Very often these sorts of clauses are ignored, or at best given only scant attention, despite a steadily increasing number of cases which demonstrate their importance when things go wrong between the parties.

The case also highlights how strictly the Irish courts will interpret the substance of transactions in the event of a disagreement over whether an unlawful distribution has been made. Finally it confirms that it is not possible to use a company's articles of association to attempt to circumvent provisions of the Companies Acts (such as Section 45 of the 1983 Act), to convert a dividend entitlement into a debt due.