In this week's update: a distribution was valid despite discrepancies in the accounts justifying the dividend and an examination of vexatious resolutions.
Court considers whether demerger by dividend was valid (part 2)
In this week's update: directors implementing a management buy-out did not owe fiduciary duties to the other shareholders and a distribution was valid despite the relevant accounts not being in the usual format.
Directors did not owe fiduciary duty to shareholders
The High Court has held that the directors of a company did not owe a fiduciary duty to the company’s shareholders when implementing a management buy-out (MBO).
What happened?
On 11 July 2019, HMRC published its summary of responses to its “protecting your taxes in insolvency” consultation.
Following the consultation, the government will legislate in the Finance Bill 2019-20 to make HMRC a secondary preferential creditor for certain tax debts paid by employees and taxpayers. This change is intended to ensure that when a business enters insolvency, more of the taxes paid in good faith by employees and taxpayers go to the Exchequer, rather than being distributed to other creditors. Draft legislation and an explanatory note is also available.
On 11 July 2019, HMRC published a policy paper discussing measures which are aimed at those taxpayers who “unfairly seek to reduce their tax bill by misusing the insolvency of companies”. This will be achieved by making directors and other persons connected to those companies jointly and severally liable for the avoidance, evasion or “phoenixism” debts of the corporate entity.
An explanatory note and draft legislation set out the conditions that must be satisfied in order to enable an authorised HMRC officer to issue a “joint liability notice” to an individual.
Insolvency of the suspected fraudster may seem the end of the hunt, unless an egg-hunter can establish a proprietary interest in the assets (see our blog yesterday). But it can offer additional clues, or alternative pots of treasure, whether the fraudster is an individual or corporate entity.
The Institutional Limited Partner Association (ILPA) has published recommendations for how “GP-led fund restructurings” should be organised. These transactions occur when a fund sponsor (GP/manager) introduces a secondary purchaser to buy assets out of one of its existing funds, typically into a new fund structure where the same GP is the manager. Such transactions are complex and inevitably throw up conflict issues. Investors regularly complain that GPs are short on transparency and slapdash with timelines when trying to do one of these deals.
On 26 February 2019, HMRC launched a consultation entitled “Protecting your tax in insolvency”, on the government’s proposal to make HMRC a secondary preferential creditor for taxes paid by employees and customers (the new powers are contained in the proposed Finance Bill 2019-20).
No. The Court of Appeal upheld the High Court’s original finding, namely that no duty to consider AWA’s creditors had arisen. Whilst AWA’s directors had made provision for the contingent liabilities in question, this did not itself mean AWA was insolvent or close to insolvency. In fact, it was not, and so the duty to consider AWA’s creditors never arose.
Practical implications
Although this decision simply confirms the High Court’s original decision, it emphasises the care and vigilance with which directors of a company need to act when paying dividends.
Court confirms dividends can be transactions at an undervalue
The Court of Appeal has confirmed that a dividend paid by a company to its shareholders can constitute a transaction at an undervalue under insolvency law.
What happened?
At the initial hearing, the High Court found the dividend was caught by section 423 and was therefore invalid. Importantly, it said that a dividend could constitute a transaction at an undervalue. This was an important confirmation, and the High Court has since followed this approach (for example, in Dickinson v NAL Realisations (Staffordshire) Ltd).