Lloyd's Maritime and Commercial Law Quarterly
RECIPIENT LIABILITY FOR UNLAWFUL DIVIDENDS
It’s a Wrap v. Gula
The Court of Appeal in It’s a Wrap (UK) Ltd (in Liqn)
v. Gula
1
considered the narrow question of the state of knowledge necessary to render a recipient of unlawful dividends liable to return those dividends under s 277(1) of the Companies Act 1985 (restated as s 847(1) and (2) of the Companies Act 2006). In particular, the issue addressed by the Court of Appeal was whether liability in this regard is based on wrongdoing alone or whether the conscience of the recipient also needs to be affected.
The obligation to repay a distribution, imposed on a member of a company by s 277(1), arises where two conditions are satisfied. The first is that the distribution has been made in contravention of Part VIII of the Companies Act 1985. The second is that, at the time of the distribution, the member “knows or has reasonable grounds for believing that it is so made”.2
The first caused no difficulties on the facts of this case. In respect of the years ending 31 December 2001 and 31 December 2002, the appellant company made trading losses of £17,641 and £36,591 respectively. Notwithstanding that there were no realized profits, and indeed no profits of any kind, the respondents, who were directors and shareholders of the appellant, caused the company to pay £14,000 to each of them in respect of 2001 and 2002. It was common ground that these payments contravened s 263 of the Companies Act 1985 (restated as s 830 of the Companies Act 2006), which prohibits a company from making a distribution unless out of profits available for the purpose.
The question then arose whether the recipient must know (or have reasonable grounds to believe) that the payment is being made in contravention of the Companies Act (a
1. [2006] EWCA Civ 544; [2006] BCC 626.
2. Companies Act 1985, s 277(1). The Company Law Review Steering Group did not propose any changes to this provision: DTI, Modern Company Law for a Competitive Economy: Company Formation and Capital Maintenance
(October 1999), 53; DTI, Modern Company Law for a Competitive Economy: Completing the Structure
(November 2000), 152–153; DTI, Modern Company Law for a Competitive Economy: The Final Report
(June 2001), ch 10. This knowledge requirement is left untouched in the new Companies Act 2006: s 847(1) and (2). In addition, although the Second Company Law Directive is in the process of being amended (see
http://europa.eu.int/comm/internal_market/company/capital/index_en.htm
), the knowledge requirement in Art 16 is not one of the provisions under review.
LLOYD’S MARITIME AND COMMERCIAL LAW QUARTERLY
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