Member Article

Dangerous Distributions?

With Watson Burton LLP Law Firm

The Companies Act 2006 (“2006 Act”) provides a new statutory framework for company law, and continues to come into force in stages.

Part 23 of the 2006 Act regulating distributions by a company came into force with effect from 6 April 2008, and restates and amends Part 8 of the Companies Act 1985. A distribution is widely defined as every description of distribution of a company’s assets to its members, whether in cash or otherwise (subject to certain specific exceptions). The material changes introduced by the 2006 Act provide statutory authority for the technical treatment of benefits in kind, such as intra-group asset transfers. This was an area that was previously subject to some uncertainty but the regulation of other distributions, including dividends, largely remains unchanged. However, a distribution that does not comply with Part 23 of the 2006 Act will be unlawful, and directors should familiarise themselves with the new provisions at sections 823-853 of 2006 Act.

Before a company can make a distribution, it must ensure that it has sufficient ‘profits available for the purpose’. That is, the company’s accumulated, realised profits less its accumulated, realised losses. A distribution must be justified by reference to the ‘relevant accounts’, and this will ordinarily be the company’s last annual accounts. Where a distribution cannot be justified by reference to the annual accounts, a company may rely upon ‘interim accounts’ (or ‘initial accounts’ in circumstances where a newly incorporated company has yet to file annual accounts). There is no criteria laid down as to the form of interim accounts, save that they must enable a reasonable judgment to be made of (a) profit, losses, assets and liabilities; (b) accounting provisions of any kind; and (c) share capital and reserves (including any undistributable reserves).

Any shareholder who knows, or has reasonable grounds to believe, that the distribution is in contravention of the statutory requirements is liable to repay it to the company.

In addition to ensuring that the distribution can be justified, directors should also have regard to their common law duties and recently enacted statutory duties. In particular, directors should give consideration to the present and future solvency of the company taking into account the proposed distribution, and should also exercise reasonable care, skill and diligence. A director who authorises the payment of an unlawful distribution in breach of his duties may be personally liable to repay the company, even if the director is not a shareholder. Directors should therefore take care to ensure that the matter is given due and proper consideration, and that the company board minutes adequately evidence the efforts of the directors to comply with their duties.

If you have any comments or questions about this article or about any other corporate related matter, please email gareth.booth@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .