Can I keep my monthly dividend? – It depends

In the case of Jones -v- Sky Wheels Group [2020] EWHC 1112 (Ch), the judge concluded that it was sufficiently arguable that a shareholder who had been paid over £400k on account of dividends did not have to repay that money until the directors and shareholders had decided whether to declare a dividend which would reduce his liability to repay monies to the company

Background and context

For a variety of reasons many owner/managers of businesses run through a limited company decide to pay themselves by a mixture of PAYE salary and dividends. Occasionally this is done for cashflow reasons, in which case the shareholders will simply receive their PAYE salary (often set at the national insurance threshold) and will do so on a monthly basis.

However, when the rationale is the tax advantages that might accrue, the shareholders will often decide what they want to pay themselves at a “market rate” on a monthly basis but only put part of that through the PAYE system. The rest of their regular monthly payment is, in effect, a payment on account of the dividend that they intend to declare at the end of the year.

Associated risks of monthly dividends

…but this can lead to potential problems. In the Jones case Mr Schofield was the founder and majority shareholder of the company. Mr Jones was a director and minority shareholder who had an overdrawn directors loan account in the sum of £418,609.28 most of which related to sums that he had been paid on account of dividends that he was due to be paid in place of salary and a bonus.

Mr Schofield arranged for the company to serve a statutory demand on Mr Jones requesting repayment of this sum. He did this for tactical reasons within the context of a wider shareholder dispute. Unless Mr Jones could have the statutory demand set aside he would be deemed unable to pay his debts and would have been made bankrupt.

In setting aside the statutory demand, the judge decided as follows:

• The monthly payments of £8,250 which had been made to Mr Jones were to be regarded as payments in anticipation of the company issuing a dividend. Therefore, until such times as that dividend was declared there could be no cross claim or set off.
• Secondly, the judge considered that the debt was disputed on substantial grounds in that it was sufficiently arguable that Mr Jones had a “legitimate expectation” that the company would not demand repayment unless and until the directors and members had considered in good faith whether to declare a dividend.

Practical advice

Some of the adverse consequences of this approach could have been avoided if the directors had taken steps to declare an interim dividend in respect of the sums that were being paid. In particular it is risky to allow debts of this magnitude to accumulate.

In that case, there was no formal agreement. However, it seems clear that the rights of the  shareholders as between each other, can also be determined by an agreement between them. Ideally, in order to avoid conflict at a later date, such an agreement needs to be in writing. It does not necessarily need to be in a “shareholders agreement” of a longer and more formal nature which might deal with a number of other aspects of the relationship. It could simply be recorded in writing or indeed in the board minutes.

Summary

Informal and ad hoc arrangements for paying dividends can often work whilst the parties have a strong and healthy relationship. However, those who are shareholders as well as directors and employees would do well to make sure they understand the default position if the relationship turns sour.

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