(b) Under the rule in Flitcroft’s case any directors of a company who breached the distribution rules, and knowingly paid dividends out of capital, were held jointly and severally liable to the company to replace any such payments made. The fact that the shareholders might have approved the distribution did not validate the illegal payment (Aveling Barford Ltd v Perion Ltd (1989)). Also at common law shareholders who knowingly received, or ought to have known that they had received an unlawful dividend payment were required to repay the money received, or to indemnify the directors for payments they might have already been required to have made (Moxham v Grant (1900)). Section 847 Companies Act 2006 restates the common law rule, providing that shareholders, who either know or have reasonable grounds for knowing that any dividend was paid from capital, shall be liable to repay any such money received to the company.
Applying the foregoing to the problem at hand it is apparent that the loss from 2008–2009 cannot be ignored, as the company is required to take accumulated losses into account. Nor can the paper profit of £5,000 generated by the asset revaluation be taken into account as it is unrealised. As a result the realised trading profit of £3,000 for the year 2009–10 has to be set against the loss of £2,000 from the previous year, which means that Fan plc only had £1,000 available for distribution to its members by way of dividend.
As dividends amounting to a total of £4,000 was paid, it is apparent that £3,000 too much was paid in dividends.
As a result any shareholder who either knew or had reasonable grounds for knowing that the dividends were improperly paid will have to recompense the company to the extent that their dividends were overpaid. In the final analysis Dee and Eff will be personally liable to make good the difference to the company for any payments made to shareholders who do not fit into that category. |
