Article

Ignorance of the law

A recent case considered the position of a shareholder who received dividends which the company was not legally entitled to make. He claimed not to be liable to return the money because he did not know of the restrictions in the Companies Act 1985 on the making of distributions. The Court was unimpressed.
A company must not pay a dividend except out of profits available for distribution and a shareholder receiving a dividend which he knows or has reasonable grounds for believing that it is unlawful, must repay it to the company.

The company, by now in liquidation, claimed repayment of dividends paid to the company’s only shareholders and directors, over a two-year period during which the company had no available profits. The shareholders claimed that the payments were not dividends but salary, and had been treated as dividends in the accounts on their accountant’s advice in order to gain a tax advantage, which is not illegal.

The Court of Appeal decided that a shareholder cannot claim that he is not liable to return a dividend because he did not know of the legal restrictions on the making of distributions.

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