Crispin Hayhoe appeared in the Court of Appeal case of Global Corporate Ltd v Hale Court of Appeal (Civil Division), 27 November 2018, before Patten LJ, Asplin LJ and Coulson LJ.
The Claimant, who had purchased the right to pursue the directors from the Liquidator, sought recovery of monthly dividend payments made at a time when there were no relevant accounts showing that the company had distributable profits. At the original trial the court heard that the directors believed that the company was trading profitably and that at the year end there would be distributable profits but, that if there were not, the dividend payments would be reclassified as salary payments and additional tax paid to the Revenue. The dividends had been paid on the advice of the company accountant and sought to benefit from the favourable tax treatment that such payments enjoy (a practise which is very common among small owner / managed companies). The directors relied of the accountant’s advice, and deferred the final decision to him, after the year end.
The appeal sought to reverse the decision at first instance that because there was no clear evidence of intention to pay a dividends at the time of payment, these transfers could not be said to be distributions and so did not fall foul of the statutory provisions requiring distributable profits. In overturning the first instance decision, the Court of Appeal criticised the trial judge for his questioning of the unrepresented director. The Court of Appeal held that when the payments were made and declared to the Revenue as dividends, that this was what they were – the Court of Appeal rejected the suggestion that the nature of the distributions could be altered after the event.
The Court’s decision means that those advising small businesses (trading in difficult times) need to be sure, in seeking to remunerate the owner / managers in a tax efficient manner way by a mix of dividends and salary, that there are indeed “relevant accounts” showing distributable profits.