Liz O’Connor, Partner at RDP Law discusses does ‘money make the world go round’ or is it the ‘the root of all evil’?

This is a hugely contentious topic. In my experience, and particularly in business, it is often the reason why disputes arise between Directors and Shareholders. Allegations of taking excessive remuneration and / or dividends which are inconsistent or inappropriate in comparison to the financial constraints of a company, can be incredibly divisive, and can often lead to protracted, and costly, disputes.

If a shareholder considers a Director’s remuneration is excessive, or if there are unreasonable expenses being claimed, they can challenge the payments as being unfairly prejudicial under section 994 of the Companies Act 2006. If successful, Directors can be ordered to repay monies to the company. This was the exact situation in the case of Maidment v Attwood and Others where the court held that the company’s director had breached his duties as a director in setting his salary consistent with his own interests, in contrast with his duties as a director, and ordered repayment of the remuneration back to the Company. A Director should not be acting in their own best interests; Directors must act in the best interests of the Company. Directors run the major risk of being on the receiving end of litigation if they do not abide by those rules.

So how do you safeguard against the risk of a claim being made against you?

A starting point would be to determine what salary package is reasonable for your specific job. There are a wide range of factors which will have an impact such as industry, level of responsibilities, geographical location, expertise and more. Keep track of what similar companies pay for your level of experience, what is the market average for that industry and for companies of the same size? This should be regularly reviewed, and records taken of such reviews. Another step that could be taken which would make it harder for shareholders to successfully claim, is to include provision in the shareholders’ agreement that director’s pay is a matter that requires all or a majority of shareholders to agree.

If a Director is also a shareholder, they may be entitled to dividends. Dividends can be paid according to the proportion of shares that the Director owns. If that Director allows dividends to be paid which a company cannot afford, or which is detrimental to the company and / or its creditors, this may constitute misconduct and give rise to a litigious dispute, as the dividends will be deemed to be illegal dividends known as ultra vires dividends. Don’t think that the corporate veil will cover the Directors in this scenario, there is specific provision for insolvency practitioners to pursue Directors for conduct of this nature.

The Companies Act 2006 is clear in that dividends should not exceed net profits (after taxes). Section 830 states that a company may only make a distribution out of profits available for the purpose. Dividends may be paid unlawfully in a number of circumstances including where profits have been miscalculated or an incorrect figure from the accounts is used, where there is poor record keeping, or if the company becomes insolvent.

To safeguard this situation, as above, payment of dividends can also be regulated by the shareholder’s agreement. Furthermore, when calculating dividend payments, use the last circulated annual accounts and seek your accountant’s advice before paying a dividend, draw up proper paperwork every time a dividend is declared, such as directors’ board minutes approving the dividend, interim or annual accounts and dividend counterfoils. Remember, ignorance of the law is no defence! If the company does not have sufficient profits to cover dividend payments, it can expose a Director to the risk of personal liability issues.

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