© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Distributions and dividends
Identifying distributions​​
​
- Not every transfer of value is a distribution
​
"[24] The essential issue then, is how the sale by PPC of its shareholding in YMS is to be characterised. That is how it was put by Sir Owen Dixon CJ in Davis Investments Pty Ltd v Commissioner of Stamp Duties (New South Wales) (1958) 100 CLR 392, 406 (a case about a company reorganisation effected at book value in which the High Court of Australia were divided on what was ultimately an issue of construction on a stamp duty statute). The same expression was used by Buxton LJ in MacPherson v European Strategic Bureau Ltd [2000] 2 BCLC 683, para 59. The deputy judge did not ask himself (or answer) that precise question. But he did (at paras 39-41) roundly reject the submission made on behalf of PPC that there is an unlawful return of capital "whenever the company has entered into a transaction with a shareholder which results in a transfer of value not covered by distributable profits, and regardless of the purpose of the transaction". A relentlessly objective rule of that sort would be oppressive and unworkable. It would tend to cast doubt on any transaction between a company and a shareholder, even if negotiated at arm's length and in perfect good faith, whenever the company proved, with hindsight, to have got significantly the worse of the transaction.
...
[27] If there were a stark choice between a subjective and an objective approach, the least unsatisfactory choice would be to opt for the latter. But in cases of this sort the court's real task is to inquire into the true purpose and substance of the impugned transaction. That calls for an investigation of all the relevant facts, which sometimes include the state of mind of the human beings who are orchestrating the corporate activity.
[28] Sometimes their states of mind are totally irrelevant. A distribution described as a dividend but actually paid out of capital is unlawful, however technical the error and however well-meaning the directors who paid it. The same is true of a payment which is on analysis the equivalent of a dividend, such as the unusual cases (mentioned by Dr Micheler) of In re Walters' Deed of Guarantee [1933] Ch 321 (claim by guarantor of preference dividends) and Barclays Bank plc v British & Commonwealth Holdings plc [1996] 1 BCLC 1 (claim for damages for contractual breach of scheme for redemption of shares). Where there is a challenge to the propriety of a director's remuneration the test is objective (Halt Garage), but probably subject in practice to what has been called, in a recent Scottish case, a "margin of appreciation": Clydebank Football Club Ltd v Steedman 2002 SLT 109, para 76 (discussed further below). If a controlling shareholder simply treats a company as his own property, as the domineering master-builder did in In re George Newman & Co Ltd [1895] 1 Ch 674, his state of mind (and that of his fellow-directors) is irrelevant. It does not matter whether they were consciously in breach of duty, or just woefully ignorant of their duties. What they do is enough by itself to establish the unlawful character of the transaction.
[29] The participants' subjective intentions are however sometimes relevant, and a distribution disguised as an arm's length commercial transaction is the paradigm example. If a company sells to a shareholder at a low value assets which are difficult to value precisely, but which are potentially very valuable, the transaction may call for close scrutiny, and the company's financial position, and the actual motives and intentions of the directors, will be highly relevant. There may be questions to be asked as to whether the company was under financial pressure compelling it to sell at an inopportune time, as to what advice was taken, how the market was tested, and how the terms of the deal were negotiated. If the conclusion is that it was a genuine arm's length transaction then it will stand, even if it may, with hindsight, appear to have been a bad bargain. If it was an improper attempt to extract value by the pretence of an arm's length sale, it will be held unlawful. But either conclusion will depend on a realistic assessment of all the relevant facts, not simply a retrospective valuation exercise in isolation from all other inquiries.
[30] Pretence is often a badge of a bad conscience. Any attempt to dress up a transaction as something different from what it is is likely to provoke suspicion. In Aveling Barford there were suspicious factors, such as Dr Lee's surprising evidence that he was ignorant of the Humberts' valuation, and the dubious authenticity of the "overage" document. But in the end the disparity between the valuations and the sale price of the land was sufficient, by itself, to satisfy Hoffmann J that the transaction could not stand." (Progress Property Company Ltd v. Moorgarth Group Ltd [2010] UKSC 55, Lord Walker)
"[76] It is also clear, in my view, that a mere arithmetical difference between the consideration given for the asset or assets and the figure or figures at which it or they are in subsequent proceedings valued retrospectively will not of itself mean that there has been a distribution. If the transaction is genuinely conceived of and effected as an exchange for value and the difference ultimately found does not reflect a payment 'manifestly beyond any possible justifiable reward for that in respect of which allegedly it is paid', does not give rise to an exchange 'at a gross undervalue' and is not otherwise unreasonably large, there will not to any extent be a 'dressed up return of capital'. In assessing the adequacy of the consideration, a margin of appreciation may properly be allowed.
...
[79] It is plain, in my view, that directors are liable only if it is established that in effecting the unlawful distribution they were in breach of their fiduciary duties (or possibly of contractual obligations, though that does not arise in the present case). Whether or not they were so in breach will involve consideration not only of whether or not the directors knew at the time that what they were doing was unlawful but also of their state of knowledge at that time of the material facts. In reviewing the then authorities Vaughan Williams J in Re Kingston Cotton Mill Co (No 2) said at [1896] 1 Ch, p347: 'In no one of [the cases cited] can I find that directors were held liable unless the payments were made with actual knowledge that the funds of the company were being misappropriated or with knowledge of the facts that established the misappropriation.' Although this case went to the Court of Appeal, this aspect of the decision was not quarrelled with (see [1896] 2 Ch 279)" (Clydebank Football Club Ltd v Steedman 2002 SLT 109, Lord Hamilton; approved in Progress Property at §32)
​
- Setting off dividend declared against director's loan account is a distribution
"[99] I summarised my reasons above that the 'positive action which affects the Company's finances in some definite way' was the decision in July 2016 not just to declare a dividend of £560,000, but to allocate it to reduce the balance of the directors' loan account, at that stage almost £700,000, and record that in the 2014-15 accounts, I shall call by the neutral word 'transaction' (which a dividend can be: Sequana CA). In my judgment, in July 2016, even before the entry was made on Sage in April 2017, that transaction was a 'distribution' both under s.829 CA and in common law, for five alternative reasons:..." (Manolete Partners Plc v. Rutter [2022] EWHC 2552 (Ch), HHJ Tindal)
​
- Distribution is made at time of accounting transaction
"[107] Ultimately, a 'distribution' by actual transfer of assets (e.g. a bank transfer from a company's bank account to a shareholder's bank account) happens on a particular day. Likewise, where a 'distribution' is by 'accounting transaction', it should happen on the date that happens. If there is a choice of date between earlier statutory accounts where the 'distribution' of dividend and offset on liability are recorded as happening (indeed as having happened retrospectively); and a later internal journal entry where only one side is recorded, objectively and rationally, the date of the formal accounts must be the date of 'distribution'. This is especially as s.829(1) CA applies to 'every description of distribution of a company's assets to its members, whether in cash or otherwise'. Therefore, objectively, in substance, the date of 'distribution' here was 29th July 2016." (Manolete Partners Plc v. Rutter [2022] EWHC 2552 (Ch), HHJ Tindal)
​
- Company law definition must include legally ineffective transactions otherwise it would be circular
"[101.2] As to legally-effective transactions, again this would go against the ordinary meaning of the words Parliament has used in s.829. As Buckley observes, s.829 gives a wide meaning of 'distribution' including 'every description of distribution ….whether in cash or otherwise' which is a 'distribution' of the company's assets to its members. The statutory phrase 'every description of distribution' contradicts any limitation to 'only legally-effective distributions'. Nor does the word 'distribution' carry any requirement of being itself 'legally-effective'. It is a 'factual word', not a legal term of art like 'sale', 'disposition' of 'gift'. Of course, 'distributions' can consist of or include legal transactions (see e.g. s.845 CA), but there is no suggestion in the wording of s.829 (or for that matter, s.845 CA) that they must do so. Indeed, as discussed in Sequana, in law a dividend is given for no consideration (although not a 'gift') and may be unilateral. Yet surely a 'dividend' is the paradigm example of a 'distribution' in s.829 CA. It is also difficult to understand why Parliament would have intended to include within s.829 CA legally-effective transactions such as undervalue sales of company assets to shareholders and require them to be 'lawful' under the detailed rules of Part 23, but to exempt legally-ineffective factual transfers or payments. It would undermine the purpose of the actual provisions to regulate all 'distributions' and indeed be inconsistent with the words of s.829: 'every description of distribution'.
...
[108.3] This interpretation of s.329 CA both in isolation and in context is also consistent with the statutory purpose of Part 23 CA in general and of the wide scope of 'distribution' in s.329 in particular. The reason Parliament intended a wide meaning to 'distribution' is obvious: it is to ensure the net is cast wide over 'distributions' so that more transactions are regulated by Part 23 and to reduce the scope for avoidance of it. As the cases suggest, many transactions may practically 'distribute' company assets to members but be structured in a way to disguise that, such as the 'management charge' on the subsidiary which otherwise had no liability to pay its parent in SSF, or the suspicious sale at an undervalue in Satyam (if not the unwise but genuine one in Moore). This is the reason why, as emphasised in Moore, the focus must be on the substance rather than just the form of transaction. However, that does not mean that the form of the transaction is irrelevant. If it takes the form of a dividend allocated by shareholder-directors to reduce their directors' loan and that is recorded in the company accounts, unless it is not genuine in substance, that is a 'distribution' even without further action, even if no money changes hands and it has no legal effect. After all, it still has practical implications: directors' understanding of their debt and further borrowing; and the company's distributable reserves, solvency, liquidation etc. It is also consistent with the statutory purpose if this is a 'distribution' in s.829 CA. Director-shareholders wishing to reduce loan liability to the company have an incentive to use dividends to do so. Indeed, it is more likely now after s.197 Companies Act 2006 made directors' loans lawful if authorised by ordinary resolution. To allow director-shareholders to argue that the use of a dividend to reduce their loan liability as recorded in the statutory accounts did not amount to a 'distribution' because it was not recorded in management accounts would create a lacuna in the coverage of Part 23 CA. It would undermine the protection it offers to the company and indeed to creditors; and create confusion on how much the directors actually still owe to the company. Indeed, a wide approach to 'distribution' is consistent with Part 23's statutory purpose and indeed fair. Just because a transaction amounts to a 'distribution' does not mean it is unlawful. Lawfulness is assessed by reference to 'relevant accounts' under ss.836-8 and individuals' knowledge under s.847 CA. If I may be permitted a florid metaphor, Parliament was obviously content to cast the net wide over 'distributions' in the knowledge that the holes in it are big enough to let the little fish swim free." (Manolete Partners Plc v. Rutter [2022] EWHC 2552 (Ch), HHJ Tindal)
​
Procedure
​
- Sole shareholder can force dividend by ordinary resolution and override requirement for director recommendation
"[42] In this case, the Articles of Association of the subsidiary (WMF) incorporated Regulation 102 in Table A which states that "… the company may by ordinary resolution declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the directors" (although this Regulation is the provisions of the Companies Act 2006, there was no submission that any provisions restricting payment of dividends applied to WMF in this case).
[43] HMRC contended that this meant that WMGH as sole shareholder could have compelled, by means of an ordinary resolution, WMF to declare dividends: although the regulation is subject to a directors' recommendation as to quantum, the Appellants were the majority of the directors of WMF. Further, they contended that WMGH as sole shareholder could rely upon the Duomatic principles (set out in In re Duomatic Ltd [1969] 2 Ch 365, although dating from much earlier) that the informal approval of all the members of a company is sufficient to ratify a breach of fiduciary duty
[44] The High Court in In re Burnden Holdings (UK) Ltd (in liquidation) [2019] EWHC 1566 (Ch) specifically stated that "the proviso in paragraph 102 that the company by ordinary resolution could not declare a dividend in a sum greater than that recommended by the directors was one which could be waived by all the shareholders acting unanimously, on the Duomatic principle".
...
[48]...I agree with HMRC's contentions regarding the interaction of the Articles of Association of [Subsidiary] and the Duomatic principle: the distributable reserves of [Subsidiary] were amounts which were available to [Parent] at the time of the transaction. The fact that [Parent] would have had to resolve, as sole shareholder of [Subsidiary], that a dividend to be paid to it and also resolve to waive the restriction in regulation 102 does not mean that these were not assets available to it. Those actions were entirely within [Parent]'s control without a third party's involvement and so, in my view, the distributable reserves of [Subsidiary] were amounts available to [Parent] for distribution by way of dividend." (Oscroft v. HMRC [2026] UKFTT 251 (TC), Judge Fairpo)
​
- Distributions must be supported by relevant accounts
"(1) Whether a distribution may be made by a company without contravening this Part is determined by reference to the following items as stated in the relevant accounts—
(a) profits, losses, assets and liabilities;
(b) provisions of the following kinds—
(i) where the relevant accounts are Companies Act accounts, provisions of a kind specified for the purposes of this subsection by regulations under section 396;
(ii) where the relevant accounts are IAS accounts, provisions of any kind;
(c) share capital and reserves (including undistributable reserves)." (CA 2006, s.836)​
​
- ​Relevant accounts: last accounts or interim accounts
​
"(2) The relevant accounts are the company's last annual accounts, except that—
(a) where the distribution would be found to contravene this Part by reference to the company's last annual accounts, it may be justified by reference to interim accounts, and
(b) where the distribution is proposed to be declared during the company's first accounting reference period, or before any accounts have been circulated in respect of that period, it may be justified by reference to initial accounts.
(3) The requirements of—
section 837 (as regards the company's last annual accounts),
section 838 (as regards interim accounts), and
section 839 (as regards initial accounts),
must be complied with, as and where applicable.
(4) If any applicable requirement of those sections is not complied with, the accounts may not be relied on for the purposes of this Part and the distribution is accordingly treated as contravening this Part." (CA 2006, s.836)
​
- Accounting records not sufficient
"[63]...We find that VP did fail to comply with section 270 CA85 and, as a result, VPT did not acquire a valid entitlement to call for a conveyance to it of the Property. We consider that section 270 CA85, properly interpreted in context, requires the production of an identifiable contemporaneous single document which records the required items under section 270(2) CA85. The degree of detail and formality of that document may vary, depending on the context, but a single document is, in our view, required in all cases. We draw a clear distinction between a company's accounting records (which will be used in preparation of accounts) and its accounts (which are compiled from those records, on the basis of judgments made by the directors). We are satisfied that in the present case, no accounts (within the meaning of section 270 CA85) were prepared and therefore the Dividend was unlawful under section 263 CA85. It follows that VPT never became entitled to call for a conveyance of the Property as a result of the declaration of the Dividend." (Vardy Properties v. HMRC [2012] UKFTT 564 (TC), Judge Poole)
​
Creation of a debt​
​
- Declaration of final dividend creates immediate debt
"[37] Further, it is clear that in the case of a final dividend, the declaration of a dividend by the company in general meeting gives rise to a debt payable by the company to shareholders." ​(HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
​
- Interim dividend usually does not create debt prior to payment
​
"[22] In Lagunas Nitrate Company Ltd v Schroeder and Co and Schmidt (1901) 85 LT 122, the directors resolved to pay an interim dividend. Shortly afterwards, in light of pending litigation, the directors resolved to postpone payment of the interim dividend. Joyce J noted that Lindley on Company Law and Buckley on the Companies Acts stated that “where a dividend is declared it becomes a debt due from the company to the shareholders”. However, he distinguished the declaration of a dividend and a resolution for payment of an interim dividend. He held that prior to payment of an interim dividend, the company was not obliged to pay it. The directors could reconsider whether it ought to be paid at all." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
​​​​
- Interim dividend usually does create debt once paid to one shareholder
​
"[39]...We see no reason to distinguish between final dividends and interim dividends at the stage where the directors have not only resolved to pay a dividend but have also made payment to some but not all of the shareholders. If a shareholder is not paid their share of an interim dividend then a debt arises at the time the other shareholders are paid. That must follow from the principle that shares of the same class confer the same rights and impose the same liabilities." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
​​​​
- Subject to agreement to the contrary
​
"[72] Overall, we consider that the FTT did not err in failing to specify what amendment was being made to the articles. The FTT specified the amendment at [100] and [101] of the Decision. Further, the FTT was entitled to find that the members intended to informally amend the articles even though they did not have the articles in mind when agreeing the terms on which the interim dividend would be paid." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
​​​​
- Or subject to binding waiver by the shareholder
"[86] The parties’ arguments on waiver before the FTT focussed on whether there was consideration for such a waiver. [The taxpayer] submitted that the waiver agreement occurred before NG was paid his dividend and therefore before any debt could have arisen. The waiver was supported by consideration in that the directors of Regis agreed to pay an interim dividend and PG agreed to waive his right to enforce payment.
...
[94] We are satisfied that the FTT was right to find that the agreement it had identified did not fall within the principle of Foakes v Beer. That is because PG’s waiver of the right to enforce the debt was agreed before the directors resolved to pay the interim dividend. In those circumstances, we do not accept Mr Bradley’s submission that there was no consideration. PG agreed to waive his right to enforce payment of a dividend until after 5 April 2016 if Regis agreed to pay the interim dividend. At the time of that agreement there was no enforceable debt. It is not the case of an existing creditor agreeing to give up an entitlement to be paid without receiving anything in return.
[95] [HMRC] also submitted that the FTT was not entitled to find on the facts that there was any such agreement. He relied on the same arguments as in relation to whether there was an agreement to amend the articles for the purposes of Ground 2. Namely, that there could be no agreement to waive enforcement of a debt where the directors were simply following advice premised on an understanding that the interim dividend could be paid to NG without a debt becoming due and payable to PG. The facts were more consistent with a shared misunderstanding as to the existence of a debt than with an agreement to waive a debt.
[96] For the same reasons as set out under Ground 2, we consider that the FTT was entitled to find and did find at [114] that there was an agreement by PG to waive his right to enforce the debt. We can see no basis on which to interfere with that finding." (HMRC v. Gould [2024] UKUT 285 (TCC), Judge Cannan and Judge Tilakapala)
​​​​
Payment​​
​
- Actual shareholders entitled to whole dividend declared even if paid to another who is not a member (not ultra vires)
​
"[150] Considering the accounts and returns for all years, the entries and other evidence point towards the Appellant being the sole owner of the share(s) and that he was aware of that.
...
[154] There is a difference in the treatment of improperly paid dividends dependent upon the position of the recipient. Section 847 Companies Act 2006 provides that a recipient member who knows or has reasonable grounds to believe that a distribution or part of it is unlawful is liable to repay it or that part of it to the company. Here however Ms Hamilton was not a member.
[155] HMRC argue that the dividend paid by the company was not unlawful because the dividend was not in excess of retained profits or distributable reserves. They assert that the Appellant being the sole shareholder was entitled to the whole of the dividend declared, irrespective of how he chose to divide it. Because the Appellant was entitled to the whole of the dividend, the distributions to Ms Hamilton remained his income and a charge to tax arose under s 385 ITTOIA 2005 because it was made to the person to whom the distribution is “treated” as made, or “entitled” to the distribution. Where the distribution belongs to someone other than the recipient, that other person is chargeable to tax.
[156] We agree HMRC’s analysis that the dividend was lawful. In those circumstances the Appellant must be treated as entitled to the entirety of the dividend declared. Mr Marre argues that the purported distributions to Ms Hamilton were void: they were not “distributions” to anyone at all and cannot be taxed as such. We do not agree with that analysis as of course there is a difference between a lawfully declared dividend and a purported distribution of part to a non-member. The dividend declared by the company was not void. Any division of that dividend or purported distribution to Ms Hamilton triggered s 385 ITTOIA 2005." (Raine v. HMRC [2016] UKFTT 448 (TC), Judge Connell)
​
Ultra vires dividend
​
- Statutory remedy is without prejudice to common law relief
"[99] The statutory provision was enacted in order to give effect to Article 16 of the second EC directive on company law (77/91/EEC). Article 16 provides as follows:
"Any distribution made contrary to Article 15 must be returned by shareholders who have received it if the company proves that these shareholders knew of the irregularity of the distribution made to them, or could not in view of the circumstances have been unaware of it."
...
[101] The statutory remedy is without prejudice to any relief available at common law: s.847(3) of the 2006 Act. At common law, a distribution of a company's assets to a shareholder, except in accordance with specific statutory provisions, is unlawful and ultra vires the company: Progress Property Co Ltd v Moore [2011] 1 WLR 1, per Lord Walker JSC at [15].
[102] In Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] Ch 447, Dillon LJ, at p.457H to 458A held that because the shareholder, who received a dividend pursuant to an ultra vires act on the part of the company, "had notice of the facts and was a volunteer in the sense that it did not give valuable consideration for the money", it was a constructive trustee for the company, citing Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246, 298 (per Slade LJ) and 303 (per Browne-Wilkinson LJ), who held that those who received money from a company as a consequence of its directors' breach of duty were liable where they had notice of the breach.
[103] The parties were in agreement that the liability of LFO under s.847 as recipient of the Distribution is limited to that part of the Distribution which LFO knew or had reasonable grounds for believing was made in contravention of Part 23. No argument was advanced that the measure of relief at common law would be different." (SSF Realisations Limited v. Loch Fyne Oysters Limited [2020] EWHC 3521 (Ch), Zacaroli J)
​
- Creates no entitlement
"[53] The only unlawful feature of the declaration of the Dividend alleged by HMRC was the failure to produce initial accounts within the meaning of section 270(4) CA85, with the result that the lawfulness of the Dividend could not be tested by reference to those accounts, as required by section 270(2) CA85. It followed that the Dividend was prohibited by section 263 CA85. This meant that VPT could not be said to have been entitled to call for a conveyance of the Property at any time. As VP and VPT had common directors, VPT should be imputed with knowledge that the Dividend had been declared in breach of section 263. Under section 277(2) CA85 and the principle originally set out in Belmont Finance Corporation Limited v Williams Furniture Limited (No.2) [1980] 1 All E.R. 393 (and subsequently developed by the Court of Appeal in Rolled Steel Products (Holdings) Limited v British Steel Corporation [1985] 3 All E.R. 52 and Precision Dippings Limited v Precision Dippings (Marketing) Limited and others [1986] Ch. 447), that meant the transfer of the Property to VPT gave rise to a constructive trust of it in favour of VP, reinforcing the point that it could not be said VPT had an entitlement to call for a conveyance of the Property at any time.
...
[63] ... We find that VP did fail to comply with section 270 CA85 and, as a result, VPT did not acquire a valid entitlement to call for a conveyance to it of the Property..." (Vardy Properties v. HMRC [2012] UKFTT 564 (TC), Judge Poole)
​​
- Not income if held on constructive trust
​
"[Counsel for the Revenue] then proceeded to raise the contention that the payments were ultra vires the four companies and as such had no legal operation. It seems to me that this contention is well founded and provides the real answer to the question. The Special Commissioners have found that none of the companies had any reason to issue a debenture unless Ridge caused it to do so, and that the Marlborough companies and Anthracite had no reason at all for borrowing. Indeed, the terms of each debenture indicate on the face of it that the so-called interest represented in fact a gratuitous disposition of an enormous sum by the company concerned in favour of Ridge. On these facts, and in the absence of any further material, it seems to me to follow that it was not within the powers of the company to enter into the covenant or to make the payment. The company can only lawfully deal with its assets in furtherance of its objects. The corporators may take assets out of the company by way of dividend or, with leave of the Court, by way of reduction of capital, or in a winding-up. They may of course acquire them for full consideration. They cannot take assets out of the company by way of voluntary disposition, however described, and if they attempt to do so the disposition is ultra vires the company." (Ridge Securities Ltd v. CIR 44 TC 373 at 394, Pennycuick J - concerning whether purported payments were annual payments)
​
"Failure to comply with these requirements will mean that the distribution is unlawful (section 836(4)). Conversely, if for example directors correctly prepare interim accounts as above, a dividend paid on the basis of those accounts will be lawful, even if the annual accounts prepared later show an insufficient figure of distributable profits. The consequences of an unlawful distribution are considered below under ‘Ultra vires and illegal dividends’. The shareholders cannot agree to waive the requirements of the Act (see Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] 1 Ch 447).
...
Section 847 provides that a recipient member who knows or has reasonable grounds to believe that a distribution or part of it is unlawful is liable to repay it or that part of it to the company.
No such liability exists in respect of a member who is an innocent recipient. The immunity of an innocent recipient shareholder is illustrated in Re Denham & Co [1883] 25 Ch D 752 and Moxham v Grant [1990] 1 QB 88. This principle relates mainly to the liability of a shareholder in a quoted company, who cannot be expected to have detailed knowledge of the day to day running of the company, but simply receives a reward for holding shares by way of dividend. When dealing with private companies controlled by directors who are shareholders, such a member ought to know the status of the dividend and it is expected that section 847 will apply in the majority of such cases.
Where a dividend is paid and it is unlawful in whole or in part and the recipient knew or had reasonable grounds to believe that it was unlawful then that shareholder holds the dividend (or part) as constructive trustee in accordance with the principles stated by Dillon L J in Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] 1 Ch at page 457. Such a dividend (or part) is void for the purposes of both the Income Tax charge on distributions under ITTOIA05/S383 and the long abolished ACT charge under ICTA88/S14. The company has not made a distribution as a matter of company law, and so the dividend does not form part of the recipient’s income for tax purposes. The company has not parted with title to the sum that it purported to distribute, which as a consequence remains part of its assets under a constructive trust (see also Ridge Securities Ltd v CIR (1964) 44TC373). Where the company concerned is a close company, it is regarded as having made a loan to the shareholder by virtue of CTA10/S455(1), thereby triggering a charge under CTA10/S455(2). Relief would however be available under CTA10/S458 where the dividend is repaid to the company. That repayment might be by cash or cheque, or by a suitable entry in the loan account.
A shareholder who had no knowledge of the illegality of the dividend and no reasonable grounds on which so to believe is not a constructive trustee and does not have to repay the sum, which will constitute a distribution under CTA10/S1000 (1) B. If such a shareholder then repaid the company (although not liable to do so) this is simply a voluntary assignment or transfer of the shareholder’s own income so that it does not affect the tax position. However, in practice it is desirable to consider all such cases on their particular facts and merits." (CTM15205)
​​
- Not necessary to have all parties before Tribunal
"[Counsel for the taxpayer] rested his argument almost entirely on the proposition that it would not be right to decide this matter of corporate powers in the absence of the four companies. I agree of course that no finding of mine in this case will bind the companies, but it must, I think, be a matter of frequent occurrence that the Special Commissioners have to determine as between a taxpayer and the Revenue the effect of some document, for example a contract or settlement, in the absence of the other parties to it. No third party machinery is available. So here it seems to me that, in order to decide the issue as between Ridge and the Crown, I am bound to consider the validity of these payments made to it, and if I come to the conclusion, as I do, that they were invalid, to resolve the issue between Ridge and the Crown on that basis. It cannot be right that I should decide this issue on the footing that Ridge has received annual payments where the only proper inference from the facts is that the payments were a nullity. The contention based on the absence of the other companies has no merit, since all the companies are subsidiaries of Ridge, and Mr. Holland had all the relevant information in his possession. No application was made to me on behalf of Ridge to remit the case to the Commissioners in order that Ridge might adduce further evidence on this new point, i.e., with a view to showing that the payments were within the powers of the companies concerned. Nor was I asked to look at the memorandum of association of any of the companies. So on this point I affirm the decision of the Special Commissioners." (Ridge Securities Ltd v. CIR 44 TC 373 at 394, Pennycuick J)
​​