Any views expressed in this article are those of the author and should not be interpreted as ICAEW views or guidance.

The Main Principles

In the case of Corran and Butters ([2017] EWHC 2294), the Judge surveyed the rules relating to the non-payment of dividends in section 994 actions:

• The power to pay dividends is a matter which is normally regulated by the Articles or by Shareholders agreement;
• A failure by the directors to consider payment of reasonable dividend or to recommend payment of adequate dividend may amount to unfair prejudice;
• However, that is a difficult case to make out if the decision not to pay dividend is one which is made in good faith for what the directors reasonably consider to be in the best interests of the company. That is particularly so where it is not coupled with the payment to themselves of excessive remuneration. The court should accord weight to the commercial judgement of the board.

The Linkage to Excess Remuneration and Other Payments

The third bullet point above identifies a significant theme: if directors have rewarded themselves excessive remuneration and benefits, they cannot maintain that payment of dividends would have adversely affected the business of the company. Almost by definition such excess sums represent distributions made on an unfairly prejudicial basis.

A claim for non-payment of dividends is therefore often seen as the other side of the coin of over-inflated benefits and remuneration to the directors.

It is ironic that in the case of Corran and Butters the case as pleaded was not successful: Mr Corran had linked the non-payment of dividends to payments made to the Butters. As that aspect of the case largely failed, the case regarding non-payment of dividends shared its fate. However the Judge noted that one of the relevant businesses had generated profits of £3 million which had been paid by dividend up to a holding company. If a claim had been made in respect of those profits it seemed that the Judge would have viewed it favourably.

The McCallum-Toppin Case [2019] EWHC 46

In McCallum-Toppin and McCallum-Toppin the Judge found that the directors had failed properly to consider the payment of dividends. He considered that arguments presented in Court that the focus was on the growth of the business was “window dressing after the event”.

The Judge found that the remuneration to the directors was excessive. In addition to this, the two directors had accumulated overdrawn loan accounts aggregating to over £1 million.

The stage therefore appears to be set for the Judge to include in his award some aspect in respect of dividends which should have been declared. It is frustrating that the calculation of the financial remedy is not included in the written decision.

VB Football Assets and Blackpool Football Club (Properties) Limited [2017] EWHC 2767

In this case the Oyston family had paid themselves large amounts from the football club and another shareholder, VB Football Assets, had not received these same benefits. The Judge found that these payments were in the nature of dividends in which VB Football Assets had not participated.

His order was that VB Football Assets should receive back the original investment plus an amount equal to the excess payments taken by the Oyston family.

Booth and Booth [2017] EWHC 457

This case related to a sizeable scrap metal and demolition business, operated by one branch of an extended family.

The Judge stated that the directors’ remuneration far exceeded the amount that reasonable directors could have thought to be fair remuneration for the work that they undertook.
He dealt with this issue as follows:

“In my judgement it would be just and equitable between these parties, when valuing the petitioners' shares, that the balance sheet be adjusted to add back the excessive remuneration taken by the Booth directors in the six years to 3 July 2015. I limit the remedy to those six years because I think that any right to a remedy beyond that period is stale.”

A discount of one third was to be applied to the shares to be brought out. As there should be no discount in respect of the dividends foregone, they should be increased by a factor of 1.5 so that justice was served.

Estera Trust and Singh [2018] EWHC 1715

This was another case in which the Judge found that the remuneration paid to the managing director was excessive; the payments of these sums, and the failure to pay dividends, was unfairly prejudicial conduct.

In that case the Judge ordered that the excess amounts taken by the managing director should be treated as a quasi-cash balance for the purposes of valuing the shares.

Comment

Exclusion from participation in a quasi-partnership business remains an extremely common source of section 994 actions. In addition to exclusion, the aggrieved party will often plead his case on other grounds, including excess remuneration and absence of dividends.

It is of interest that the failure to pay dividends is not limited to quasi-partnerships: in the cases of McCallum-Toppin, Booth and Estera Trust the Judge did not find that a quasi-partnership existed. 

Andrew Strickland, Consultant
Scrutton Bland

Any views expressed in this article are those of the author and should not be interpreted as ICAEW views or guidance.