Unlawful dividends — guidance for insolvency practitioners

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This briefing note is intended to provide guidance to insolvency practitioners who wish to consider whether to seek repayment on behalf of the company of dividends paid to shareholders.

It addresses the legal requirements to be met before a dividend can be paid, under the Companies Act 2006, and the company’s articles of association, as well as at common law. It explains what can be done where dividends are found to have been paid unlawfully and considers the limited circumstances in which the court will grant relief to shareholders who have received dividends in contravention of the law.

The distribution of cash or assets of a company prior to its demise is not a rare occurrence. Where an insolvency practitioner, in the course of their investigations, uncovers such a distribution, they will wish to be satisfied that it is lawful. The courts are known to adopt a strict line when considering compliance with the legal requirements for distributions. This note considers some of the key features of the statutory rules, common law and case law relating to the most common form of distribution, namely a dividend to shareholders…

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