UK: Not A Harmless Slip Up

Last Updated: 25 April 2017
Article by Robert Wieder and Jayesh Patel

Dividend rule breaches can cause reputational damage and disillusion shareholders

Hargreaves Lansdown, the Bristol-based listed broker, which sells funds, shares and related financial products, has been found in breach of the Companies Act 2006 by the Financial Reporting Council after it failed to file the necessary interim accounts at Companies House to justify an interim dividend payment made to shareholders.

The finding followed a random FRC audit, which uncovered the procedural failings. Hargreaves Lansdown has since called an extraordinary shareholders meeting to rectify the situation. A similar scenario previously occurred with the high-street retailer Next.

This is an important reminder of how tight procedural compliance and understanding of the Companies Act is required before issuing a dividend, because where a dividend is deemed unlawful, shareholders may be required to repay the unlawful distribution if they know or have reasonable grounds for knowing that the dividend was made breaching the Act.

Dividend justification

Crucially, it is important to remember that dividends should be made only out of distributable profits of the company, while the capital of the company must be maintained. A dividend needs to be justified by the company's last annual accounts, or if these do not demonstrate sufficient distributable profits to justify the dividends, interim accounts may be prepared to show adequate profit available for distribution. Annual accounts must be properly prepared in accordance with the Act and include the auditor's report, if required under section 475 of the Act.

Interim accounts for public companies under the Act attract additional requirements under section 838, including filing the interim accounts at Companies House before deciding the dividend and being 'properly prepared' in accordance with sections 395 to 397. Hargreaves Lansdown failed to file its interim accounts at Companies House, breaching the Act's requirements.

For private companies, interim accounts do not require filing at Companies House or auditing and are typically just the latest management accounts, signed off by the directors.

Dividend declaration

Normally the Articles of Association provide that the final, end-of-financial-year dividend is declared by the shareholders of a company, following a recommendation of the directors. The amount declared should not exceed that recommended by the directors.

To formalise the dividend distribution, there will first be a directors' resolution recommending the dividend, followed by a shareholder resolution. Interim dividend payments under the Articles usually do not require shareholder approval, only formal board resolutions following the procedure set out above. Model Articles 30 to 35 are an example of the typical requirements in declaring and paying dividends.

Constitution of the company

Typically the Articles state that the dividend amount paid is apportioned against the nominal value of each share held, but the Articles may provide differently. The Articles may also include additional provisions relating to dividend distributions. It is best practice to review what the Articles require before declaring any dividends and considering if there are any differences in shareholder class rights.

In circumstances of non-compliance with the Act, as with Hargreaves Lansdown, it is prudent for a public company to post a circular to shareholders explaining the situation and proposing resolutions to be passed at an extraordinary general meeting to rectify the omission. The resolutions could, for example, authorise the appropriation of distributable reserves for dividend payments and to waive any potential claims the company has against shareholders and directors for the unlawful dividend – thereby not requiring the shareholders to repay their dividends to the company.

Good practice

Where a company has failed to take the necessary steps in declaring a lawful dividend, the company will need to convene a general meeting to request shareholders to release the directors and shareholders from personal liability to repay the unlawful dividend, which may be costly, time-consuming and upset shareholders.

The following steps are recommended as good practice:

  • Review the company's accounts and ensure there are sufficient distributable reserves
  • Review the company's Articles and the Act to consider the dividend declaration process
  • Prepare the relevant accounts in accordance with the Act and file at Companies House, if required
  • Distribute the dividend having prepared the necessary resolutions ratifying the lawful distribution.

The Hargreaves Lansdown story highlights how a seemingly small and innocuous administrative error could potentially cause reputational harm and disillusion shareholders, occasioning bad publicity.

Legal liability

The legal consequence of such an unlawful dividend is to hold the shareholders liable for its repayment. In addition, the directors become personally liable to repay the unlawful dividend for breach of their director duties, should the shareholders fail to repay.

Both Hargreaves Lansdown and Next had sufficient distributable profits to declare a dividend, so failing to file the interim accounts was more of a technical breach and the damage was mainly reputational.

Symptomatic of other issues

Peter Swabey, Policy and Research Director at ICSA comments: 'This may seem, at first sight, a rather minor issue and the Hargreaves Lansdown CEO described it as 'a technical issue'. However, it is a matter of company law and there are sound reasons for it being a requirement. Investors are, increasingly, focused on being satisfied that a company pays sufficient attention to capital maintenance and this sort of error suggests a lack of discipline on such issues.

'It may also be seen as a lack of attention to compliance, which may be symptomatic of other issues at the company. Although it is usual to rely on finance colleagues and/or the auditor to confirm that a proposed dividend can be paid, it is clear that this point can be – and has been – overlooked. We therefore strongly recommend that company secretaries check that all the necessary legal and regulatory requirements, including the appropriate filing, have been made before proceeding to payment.'

Robert Wieder is a Corporate Partner and Jayesh Patel is a Trainee Solicitor, at Bryan Cave LLP

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions