Can I safely declare a dividend considering the new economic outlook?

Patrick Tedstone, Commercial Litigation Specialist

By Patrick Tedstone

‘The Easy Jet question.’

At this time of year, many businesses have amassed considerable cash on their balance sheets that they were about to distribute (but have not yet).

Does Covid 19 prevent them from successfully doing so? Could such a payment be challenged later as a preference?

So, to gets things clear. This article will not apply to you unless your business goes into insolvency within 2 years from the distribution or unless your actions are deliberately intended to put assets beyond a creditor, that is never allowed. (Sections 239 and 423 of the Insolvency Act 1986).

But many of us are working in a business where we can no longer see that far ahead, so what are the points of law we should consider? Well, section 239 of the Insolvency Act enshrines the general principle that upon insolvency creditors should rank Pari Passu and it allows Insolvency practitioners to look back up to 2 years from the date of insolvency to test if owner-managers or their favoured suppliers benefitted from payments made by a company over the general body of creditors. 

However, it is not that straightforward for insolvency practitioners.

(1) At the moment the distribution is given the business must be unable to pay its debts as they fall due and/or its assets must be less than its liabilities.

So, if you are going to make a distribution and you are at all worried about it make sure you record the company’s trading status.

 (2) The payment or distribution cannot then cause the company to become unable to pay its debts.

Again, make a record to minute your confidence on this point with backup evidence on the day you make the distribution

(3) An insolvency practitioner must prove a desire to prefer.

In a case called re MC Bacon, the Court considered the required degree to which the company’s desire must influence the decision to enter into the relevant transaction; for s239 to be satisfied: 

“it requires only that the desire should have influenced the decision.”

It seems to us where the distribution is long-planned and still needed this should be recorded in your decision.

Conclusion

Every case is different, it is worth getting help recording your decisions prior to distribution, or significant payment being made, so that the decision stands the test of time. Contact Mike Smyth, Dan Whitehouse, Lorraine Smith or Patrick Tedstone if you are unsure, we are routinely advising on these points.

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