In Global Corporate Limited v Hale the Court of Appeal overturned an earlier High Court decision that dividend payments made to company director-shareholders were actually salary.
This case involved a complex insolvency situation where dividend payments made by the company were being deemed unlawful by liquidators. The High Court determined the payments were actually salary relying, in part, on the fact that the company’s intention was to assess, and possible recharacterise the payments as salary, at the end of the financial year if there were insufficient profits. However, the Court of Appeal overturned this decision stating that the High Court had incorrectly focused on the intention of the directors and not the nature of the payments. It highlighted that the payments had been declared as dividends to the HMRC, that they were paid to shareholders and that the directors did not have service contracts. The Court of Appeal also questioned whether it was even possible to make ‘provisional’ dividend payments like this.
This is a reminder to directors authorising such payments to consider the type of payment being made at the time and to seek advice if they are unclear as to how this will be categorised.