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The recent case of Toone v Robbins 2018 provides a useful reminder to Directors and Shareholders of the potential consequences of taking cash out of a company. Although dividends are a seen to be an attractive tax efficient way to take cash out of a company, such payments are only lawful if there are sufficient distributable reserves in the company.

If a company becomes subject to insolvency proceedings, dividend payments are likely to come under close scrutiny and may be challenged. The court will look at evidence in order to ascertain the nature of the payments and where the evidence is unclear it may be difficult to prove that such payments were taken lawfully.

In this case, Dean Robbins and Richard Robbins were both Directors of a furniture company which entered into liquidation on 23rd February 2011. The Company had paid £185,216 to the Directors a few months prior to the liquidation. The problem here was that not all payments made from the Company’s bank account had been recorded in the management accounts and therefore the liquidators argued that these were unlawful dividends and sought to recover the payments.

The Chief Registrar held that the payments recorded as “dividends” in the Company’s books were indeed dividends and relied on the information provided in the Company’s records. The fact PAYE or NIC was not deducted from the payments and the declaration in Dean Robbin’s tax return to the receipt of dividends provided that these payments were in fact dividends.

However, an issue arose about a payment of £10,098 which was not recorded in the ‘wages’ journal.

The Chief Registrar held that the payment was not unauthorised and decided that where it can be shown that Shareholders who have a right to vote at a general meeting assent to a matter then this assent would be binding as a resolution in a general meeting would be.

On appeal, Mr Justice Norris held that in the absence of clear evidence, once the burden of proof had been established, the benefit of any doubt had to be given to the liquidators. He held that it was not enough for the Directors to say that they had received money from the Company but as their record keeping was unclear, it should be assumed that the money was taken lawfully. As a result, the Directors were ordered to repay £10,098.

This case illustrates the importance of keeping clear records to show that any payments made are lawful. Evidence to the contrary may have a detrimental impact on Directors who may be ordered to repay dividends that they thought were lawful.

If you require further information on anything covered in this article please contact our Company and Commercial Law team at info@ramsdens.co.uk or call 01484 821 500.