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Unlawful dividend payments cannot be reclassified as salary

01 February 2019

The Court of Appeal recently confirmed in Global Corporate Ltd v Hale [2018] EWCA Civ 2618 what most suspected: unlawful dividend payments cannot be reclassified as salary in order to render them lawful. The legality of such payments is determined at the time of the payment, not at the time the company realises that the “dividends” were excessive, unauthorised or unlawful and then whitewashed as salary payments.

Many companies still routinely declare dividends on such an "on account" or “wait and see” basis. They should cease this practice now.

The main concern for shareholders is that unlawful payments are liable to be repaid to the company. In this instance, the company was in liquidation and the liquidator was able to demand repayment from the shareholders after the liquidation because the company had insufficient distributable reserves at the time of their receipt of excessive dividends even though those payments were then treated as salary and tax paid on them.

The shareholder concerned also failed to set off that duty to repay against monies owed to him by the company for his lawful and genuine services because his right to such payments had not been properly authorised. This is a reminder that the requirements for authorisation of payments to directors are different from payments to mere employees.

By Mark Lucas

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