UK: Will Director/Shareholders Always Be Liable To Repay Unlawful Dividends?

Last Updated: 13 August 2019
Article by Jon Chesman

When can an insolvency practitioner pursue directors for declaring unlawful dividends?

Does an insolvency practitioner need to demonstrate that the directors knew, or ought to have known, that the dividend was paid unlawfully, or is it a strict liability issue?

Can director/shareholders rely on professionally prepared accounts to avoid liability?

Dividends paid prior to a company entering into an insolvency process are often subject to scrutiny by the insolvency office-holder. The issue is a common one for owner-managed businesses where for tax purposes, directors often elect to draw a nominal salary to satisfy the national insurance threshold, whilst taking the majority of their earnings via interim dividends.

However, if the business enters into an insolvency process and the insolvency practitioner can demonstrate that the company did not have sufficient retained profits at the time the dividends were paid, then the recipients of those dividends are liable to repay the sums received in full.

This can therefore be both a significant liability for directors/shareholders, and a significant realisation for the insolvency estate.

There have been a series of recent cases examining the circumstances in which a dividend can be challenged on the basis that it has been unlawfully paid. See our previous blogs on those cases Careful consideration can pay dividends and When is a decision to declare an interim dividend a decision?

The latest case is Burnden Holdings (UK) Ltd (in liquidation) v Fielding [2019] EWHC 1566 (Ch), in which the High Court had to consider a number of key principles regarding the payment of dividends and the circumstances in which the directors can be pursued for dividends paid prior to an insolvency.

The judgment provides some comfort to directors who rely on professional advisers in determining whether to declare a dividend payment. Provided they take reasonable steps to establish that there are sufficient reserves out of which to declare a dividend (and relying on third-party professional advisors can help with that), directors may not be personally liable if such dividends turn out to be unlawful in hindsight.


In October 2007, the Burnden group of companies demerged one of its subsidiaries from the group's holding company. The holding company was financed principally by its director-shareholders. The de-merger was structured so that the holding company distributed the shares in the subsidiary to the shareholders by way of a dividend in specie, following which a number of the shares would be sold to a third party buyer. Half of the sale proceeds were then loaned to the holding company, to assist the group's cash-flow.

In October 2008, the holding company entered into administration, and subsequently entered compulsory liquidation in December 2009. The liquidators challenged the dividend on a number of different bases. One of the primary issues of interest in the case was did the liquidators need to demonstrate that the directors knew or ought to have known that there were insufficient reserves to justify the dividend, or is it a strict liability issue?

The Decision

Fault based or strict liability?

The judge held that he liquidators needed to demonstrate that the directors were aware, or ought to have been aware of the facts that would have given rise to the dividend being unlawful (such as a material liability being omitted from the accounts), even if the directors did not actually appreciate that those facts would mean that the dividend was unlawful. This was not therefore a strict liability offence and required an element of fault.

The decision is in contrast to a provisional (non-binding) view stated by Lord Hope in the Supreme Court case of Re Paycheck Services 3 Limited [2010] UKSC 51.

Relying on third party advisors?

As a matter of fact, the judge found that there were sufficient reserves to enable the dividend to be declared but ruled that even if there were insufficient reserves, the directors would not have been culpable in declaring the dividend, because it was reasonable for them to rely on their finance colleagues and external professionals to ensure that the accounts justifying the dividend were properly prepared.


The facts of this case are complex, and the case ultimately came down to the fact that the judge found that the holding company did have the required reserves to enable the dividend to be lawfully declared.

However, the judge's comments regarding whether or not the liability of the directors is strict or fault-based are worth noting.

It appears that a Court will have sympathy with directors who reasonably rely upon their advisors to advise them whether or not a dividend can be lawfully paid, even if it transpires that the accounts that were used to justify the dividends contained errors (providing that the directors were not aware of those errors).

It is also a reminder that transactions which would otherwise be justifiable if the company were solvent, may be challenged if the company subsequently enters into an insolvency process. That is a risk, and also one which comes at a cost.

Even though the directors successfully resisted the claim, no doubt, the directors will have incurred significant legal costs in resisting the claims, and a proportion of those costs will inevitably be irrecoverable.

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

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

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
Font Size:
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 (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

To Use 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.


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.


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